Low-profile market leader, Blue chip clients, Net cash position, High ROE of 18%, Low PE Ratio 9.7x, High earnings growth, Insider buying




With a market capitalisation of RM95 million, OpenSys (M) Bhd is a micro-cap company with a still small but rapidly growing revenue base that is off the radar screen of most institutional investors. The MSC-status company specialises in providing cash and non-cash payment processing solutions, including the distribution and rental of bill payment kiosks, cash recycling machines (CRM) and cheque deposit machines (CDM) as well as cheque processing services.
 
OpenSys was founded in 1995 by two former employees of the US-listed NCR Corp. Drawing on the duo’s past relationship with NCR, OpenSys started out with a three-year contract from the American company to serve its customers in Malaysia. Following its successful development of non-cash efficient service machines (ESM) for bank branches in 2001, OpenSys rapidly expanded its client base in the industry in the following years and was listed on the ACE Market in 2004.
 
Since then, its net profit has been on a tear while revenue more than tripled from RM20.3 million to RM72.5 million over 12 years. The better economies of scale, coupled with improving margins, also helped propel its return on equity (ROE) by an impressive 16 percentage points to 18.4%.
Today, the company counts among its clients all major banks in the country, such as Maybank, Public Bank, Hong Leong Bank and United Overseas Bank, and insurance and telecommunications companies.
 
Banking on dual-function machines
 
Weaker margins notwithstanding, the hardware segment has now overtaken the software and services business as the larger revenue contributor, bringing in 60% of total sales in FY2017. This was mostly due to the continued market acceptance of its CRM and it is not hard to see why this trend is catching on in the banking industry.
Combining cash-dispensing and cash deposit ATMs into dual-function machines, CRM help banks to save up to 25% to 30% in capital expenditure and operating cost in cash maintenance, cash handling and space rental. Besides higher cost efficiency, CRM also have lower downtimes compared with the traditional single-function ATMs due to the automatic recycling of cash in the machines.
 
At the company’s extraordinary general meeting last October, co-founder-cum-CEO Tan Kee Chung — also OpenSys’ largest shareholder with 21.2% equity interest — said he was optimistic of growth prospects as there was a huge opportunity to expand its market share.
He added that there were about 17,000 ATMs in Malaysia with an annual growth rate of about 5% while the penetration rate of CRM stood at a mere 4% of the installed base. “Just based on replacement alone, that is already a huge market,” he concluded.
In line with the cash recycling trend worldwide, OpenSys partnered Japan’s OKI Electric in 2013 to supply and provide maintenance services for CRMs in Malaysia. In 2014, it secured orders for several hundred CRM from two major banks in Malaysia worth over RM20 million.
OpenSys says in its latest annual report that the other banks in Malaysia have taken notice of the successful deployment of CRM in the two banks. To maintain their competitiveness, OpenSys noted that several banks had since expedited their CRM strategy by commissioning customer trials with OpenSys/OKI in 2015.
With regard to claims that Bank Negara Malaysia’s various initiatives and long-term trend to migrate to a cashless society will render its business model unsustainable, OpenSys countered that cash was still the preferred payment mode and that the number of currency notes in circulation will continue to grow.
According to Bank Negara’s Financial Stability and Payment Systems Report 2015, ATM transaction volume still grew at a CAGR of 6.7% in the past five years, albeit much lower than a CAGR of 22.9% for transaction volume carried via internet banking.
Accounting for 70% of gross profit in 2017, OpenSys’ SSS segment includes the provision of bill payment and cheque processing solutions. For the former, OpenSys manages the whole infrastructure (both hardware and software) of bill payment kiosks on behalf of utility, insurance and telecoms companies in Malaysia. In return, OpenSys charges a fee for each payment transaction performed, resulting in steady recurring income for the company.
For cheque processing solutions, OpenSys is the market leader in cheque-deposit machines and image-based cheque processing systems in Malaysia, commanding a hefty 85% of the market in local self-service machines. Commenting on the structural decline in cheque usage, the company said it would also gain if banks started to outsource the processing of cheques to third parties. OpenSys already has a track record in providing cheque-clearing services to the country’s largest bank in Malaysia.
 
Cheap valuation
Despite the high growth in earnings, shares of this low-profile company have been range-bound, trading between 26 sen and 37.5 sen over the past year. As a result, its trailing 12-month PE compressed from 19.7 times in 2014 to 15.6 times in 2015 and 13.3 times in 2017 and further to 9.7 times.
Its valuation appears comparatively cheap compared with its ACE Market-listed peers, such as Rexit Bhd (14.7 times), Microlink Solutions Bhd (N.A. lossmaking), Excel Force MSC Bhd (31.6 times) and GHL Systems Bhd (54.5 times).
OpenSys has consistently paid a dividend of one sen per share in the past five years, translating into a decent yield of 3.1%. Thanks to net profit growth, the dividend payout ratio had also dropped from 89.7% in 2010 to 44.4% in 2017. Coupled with its low capex requirements, this gives management plenty of room to increase dividends in the future.
 
44.44% Trailing 4Q earnings growth. 
(Click to enlarge)
 
CAGR of close to 40 percent
CRMs are dual-function machines that merge the cash dispensing functions of ATMs and the cash deposit functions of CDMs. CRMs accept cash from depositors and dispense them to withdrawers, so cash is essentially ‘recycled’. Banks are benefitting from the cost- effectiveness of CRMs in areas of cost of ownership, lower cash holding and reduction in cash handling cost. Banks can typically save between 25 to 30 percent in both capital expenditure and annual operational costs. 
 
These significant savings have been a major driving factor for banks to undertake major fleet replacement and consolidation, resulting in the exponential growth of CRMs. In the last five years, the total number of CRMs in the market has grown exponentially with a Compound Annual Growth Rate (CAGR) of close to 40 percent.
Source: Annual report
 
Opensys Chairman accumulating shares in open market.
Source
 
Disclaimer: The article above does not represent a recommendation to buy or sell.

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