OpenSys: Surprise bonus issue

OpenSys just announced its 2QFY15 result last week.

At first glance, it was a bit disappointed as I afraid the good performance recorded in the first quarter may be one time off did come true.

To recap, there was a jump in CRM machine sales in previous quarter.

It was a normal quarter for the group, just the selling and distribution costs increased 20% compared to previous few quarters. I have no idea about the spike. It may due to higher marketing activities to improve the sales during the quarter.

The main highlight is the group able to reduce its net debt/equity ratio from 23% in the previous quarter to 1.8% only this quarter thanks to better operating cash flow that resulted in higher cash balance.

From the segment reporting, it's good to see that the software outsourcing division was able to maintain above RM8 million revenue. Since the profit margin of the said division is much higher as well as the income is recurring in nature, the profit certainty and consistency are there.

Sale of machines is one time off and low in profit margin, but a small increase in net profit will help to drive up the EPS significantly like previous quarter.

The group also announce dividend and 1-3 bonus issue.

Is CRM still the key moving forward? I think so but the pace of converting it may not be that fast.

Recently few banks are implementing VSS to cut operating cost. So, hopefully they are going to replace the ATM with CRM and also outsourcing their cheque deposit machine to third party to reduce manpower costs.

Combine the quarter results and looking back at my buying price, it did not serve much margin of safety. I may wait until next quarter or dispose it to buy other counters when opportunity arises. Still tempting.

OpenSys: Its potential competitors

I believe there are numbers of players out there to compete with OpenSys for its cash recycler machines. But I failed to search any concrete info online regarding who is his direct competitors and their respective market share. 

Below is some of the details I managed to gather so far. 

Wincor-nixdorf is one of the world's leading providers of IT solution and services to banking industry and produce his own cash recycler machine, namely CINEO C4040 series. 

The group has its Asia Pacific regional headquarters located in Singapore as well as one office in Mount Kiara, KL. 

Its website does not provide much info regarding sales in Malaysia and Singapore. So, no idea on its market share in the CRM industry here.

The second player I managed to search is from CLSystems SR7500 CRM model. 

CL Systems is under CL International Holding Group who has been providing IT services to banking industry for decades. The group has major operations in Malaysia, Singapore, China and HK. 

Based on the info in its website, the group formed a partnership with Hitachi-Omron Terminal Solutions Corporation who is the largest manufacturer of ATMs in Japan and had installed more than 3,000 terminals in Malaysia and Singapore.

Besides the group is the first company to install a self-service cash recycler machine in Malaysia in 2011. (OpenSys just started to conduct testing trial with local bank in 2013/2014)

Based on the OpenSys AR2014, it mentioned that Malaysia has around 15k units of ATMs. 

So, if CL Systems has around 3k units in Malaysia, it has around 20% market share and as far as I see, the ATM machines in Malaysia are quite dominated by Wincor and NCR. 

OpenSys does not state its numbers of units, but I guess they have lesser than that. Else, they will state it like how they brag about their 80% market share in the cheque deposit machines. 

But the penetration rate of CRMs is still quite low at around 4%. There is still much more growth for the industry. It just depends how well OpenSys able to increase its market share in the CRM market. 

(Copy from Internet) Tetsuhei Kawamura,GM of OKI (OpenSys's partner), once said that the biggest challenge for banks to adopt the CRMs is they have to update their software, which is time consuming and brings about a learning curve to learn the new features of the software. 

Secondly, banks demand a 99.8% success rate when it comes to counterfeit recognition as the checking is done by the machine itself when the money is deposited to the machine before being withdrew by the another user. 

Finally, banks worry about the devices’ life and don’t want to spend on new machines after few years of service and it also has to be able to withstand the wear and tear caused by constant use.

And I do hope OpenSys continue to market its outsourcing model as the segment has higher margin and also in recurring term

OpenSys: Is its growth sustainable?

Recently get to know OpenSys after it reported a tremendously growth in its net profit in its latest quarter. So,  just want to take a look and conduct a simple study.  

Basically, we always find OpenSys's products around us especially in banks as well as some insurance, telecommunication and utilities company.

All this while, the group pioneered in design and development in non-cash dispensing self -service kiosks called Efficient Service Machines (ESM). The machines able to help the customers to enhance their customer service, reduce operation cost and also provide marketing information.

Besides, the group also provides business process outsourcing (BPO) for bill payment kiosks. OpenSys manages their whole infrastructure by providing hardware and software and maintenance support and services. In return, the group charges a fee for each payment transaction, resulting in steady recurring income.

The main reason of the jump in profit in Q1FY15 was due to higher amount of sales of Cash Recycling Machine (CRM).  

As stated in AR2014, several banks started to commission customer trials of CRMs with OpenSys/OKI in 2015 after the successful CRM implementation from 2 major banks in Malaysia in 2014. 

It also mentioned that the penetration rate of CRM currently stands at 4% of the installed base. 

So hopefully, there is still much more growth ahead of the group and also the CRM industry. 

But the problem is .. the gross profit margin of CRM sales is quite low compared to its Software Solution and Services (SSS) which provide licencing software and rental of ESM machines (SSS) segment. 

It's understandable as the group only purchase, manufacture and distribute the CRM machines. Profit margin will not be that high and the group is not the only one providing this kind of machines in Malaysia. 

Competition is there

I guess the margin for CRM is even lower than the standard ESM machines as the banks will trade-in their old ATM for new CRM.

So, the SSS segment is still the key.  

According to the AR2014, OpenSys is a market leader for cheque deposit  machines, commanding around 85% of the market. However, it's noted that banks started to charging a cheque processing fee of 50 cents since Jan 2015.

Management think the effect is not so significant as the cheque is mostly used by companies instead of individuals and it's hardly replaceable due to multiple signatures, post-dated cheques, large transaction limit and has intrinsic audit trail.

Even if the usage will declines, the management think that the banks will outsource the processing of cheques to third parties as it would be more cost efficient to them rather than hire a team to manage the low usage machine.

OpenSys is in strong position to benefit form the outsourcing and probably will get more and more recurring income.

This is the area which I am more interested as it has higher profit margin and recurring term.

Trade receivables increased tremendously last quarter, need to keep monitor. May due to CRM commissioning.

Net debt to equity ratio is around 0.2. I think should be okay given their historical record of operating cash flow and their low interest payment to operating margin ratio. 

Concern is how well OpenSys able to increase its CRM market share. CLSystem is another big player. And the ability to get more outsourcing. 

Let's see ..