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Wednesday, November 4, 2015

Additional capital injection & Overdued Write-Up on OpenSys

Good news, there is an additional capital injection of RM20k from my mom. Although this is getting more challenging (10% return on their capital will be RM9.755k ), I am up for it=). 

Since XC is not around for two weeks, I can spare some time to write up on OpenSys. 

OpenSys is an MSC-status company that provided solutions to financial industry. OpenSys also pioneered the design and development of a class of non-cash dispensing self-service kiosks called Efficient Service Machines (ESM) that accept deposits and payments using cash, cheques, credit and debit cards. ESMs allow banks, insurance and utility companies and government agencies to improve customer service, extend market reach and reduce operational cost. 

Financial review:
The growth that OpenSys is experiencing is exceptionally good. From the picture below, we can see that OpenSys has roughly managed to achieve the same revenue as the whole of 2014. This is largely attributed to the higher sales of Efficient Service Machine (ESM), Cash Recycling Machine (CRM) and the Business Process Outsourcing (BPO) in the FY2015 Q1. In the FY2015 Q2, the sales is almost similar to the FY2014 Q2. Lets hope that OpenSys will achieve higher sales again in Q3 =). All in all, the financial of OpenSys shows green light all over.

Pulling factors:
The main attraction of OpenSys is the Cash Recycling Machine (CRM). OpenSys partnered with OKI Electric Japan – the original inventor of cash recycling technology thirty-three years’ ago. 

At the moment, we have both cash deposit and ATM machine at banks. To mitigate the high cost of cash, the technology trend in recent years is to merge the separate functions of cash dispensing or cash-deposit into dual-function machines called CRM. CRMs can accept cash from depositors and dispense them to withdrawers so that the cash is essentially “recycled” – resulting in lower cost of ownership in the area of unused cash float, cash maintenance, cash handling and space rental. This means, the bank does not need to dispatch their staffs to replenish the ATM and cash deposit machines. As the banks continue to find ways to reduce their cost, CRM is fast becoming a must for them. So, expect more banks to install CRMs during recession. Besides savings of 25-30 percent in capital expenditure and operational cost, CRMs also provide better service levels to the banks’ customers because they have lower downtimes due to the automatic replenishment of cash in the machines. 

At present, the total number of cash-dispensing and cash deposit ATMs in Malaysia is approximately 15,000 units with an annual growth rate of about 5 percent. The penetration rate of CRMs currently stands at a mere 4 percent of the installed base. If the banks in Malaysia start to install CRMs
at their new branches, and trade-in their older ATMs for new CRMs due to its indisputable cost benefits, OpenSys can profit from it for the foreseeable future.

In March 2014, OpenSys secured orders for several hundred units of CRMs from two major banks in Malaysia worth over RM20 million. I suspect these banks to be Hong Leong Bank and Public Bank. Below is a list of the ATMs at respective banks:

Other than the CRM segment, OpenSys provides business process outsourcing (BPO) for bill payment kiosks to utility (Telekom), insurance and telecommunication companies in Malaysia. Our bill payment kiosks allow their customers to pay bills, reload prepaid cards and renew insurance premiums using cash, cheques, credit and debit cards. In return for managing the infrastructure for these organisations, OpenSys charges a fee for each payment transaction performed by their customers, resulting in steady recurring income.

3)Cheque Processing Machine
Besides that, OpenSys claims to command a hefty 85% market share in intelligent image-based cheque deposit self-service machines in Malaysia. The image-based cheque processing systems
are made up of front-end scanner devices and software applications to seamlessly capture cheque images and data and sending them to the central bank for straight-through cheque clearing and settlement. This paperless cheque clearing process that minimises the physical movement of cheques whilst converting cheques into electronic fund transfer instruments saves the banking industry hundreds of millions of ringgit per year. 

Although the cheque processing fee of 50 sen commencing 2 January 2015 is expected to reduce the cheque usage, the decline will not be significant as the business community is still very reliant on cheque as it is a time-tested payment instrument with an intrinsic audit trail and also easy to use without computer access. Even if the decline is significant, this could only mean good news to OpenSys as it would be more economical for banks to outsource the cheque processing to third parties like OpenSys. 

4)Dividend and Bonus Issue
OpenSys consistently gives semi-annual dividend payment of 5% (not dividend yield) for the past four years. This amount is not much but should be a reward for the shareholders. Recently, on 27th October, OpenSys completed a 1-for-3 Bonus Issue. The rationale for this move is to improve the trading liquidity for this stock but I suspect that there might be more things to come, for example, move to Main Board.

1)The management is undecided on the burgeoning cash
OpenSys currently has some 5mil Fixed deposits, 7mil Short Term Investment and 9mil Cash& Bank Balances. Although having cash is good, OpenSys apparently has too much cash until the extend that they can invest it in unit trust aka short term investment. In this case, it would seem that the management has no idea on how to manage these excess cash. Thus, it would be recommended to give out more dividend to the shareholders. 

After the bonus issue, I have decided to add another 30000 units of OpenSys at RM0.305. Other than that, I have also averaged up on AirAsia by adding another 3000 units at RM1.48. After these transactions Huat Fund looks like this: