$OPENSYS / 0040 (OPENSYS (M) BERHAD) – Net Cash Recurring Income Plays in the Financial Industry: An Attempt at Mapping out the Future Earnings of a Perceived Sunset Company

For overview of the company, you can read @jiaming8yap’s good writeup here: https://cutt.ly/zw4GIusv

I thought this would be an interesting exercise to try and work out; especially since there is quite a bit of information given out from their AR and AGM, where we can put 2 and 2 together to try and see the trends in revenue and profitability. This is especially “doable” since a large portion of their earnings are recurring in nature while ASP and sales volumes are also known.

I’m just sharing my scribbles and notes on how I would approach evaluating this business. It is very messy with possibly inaccurate data. This is not a buy or sell recommendation in any way, and nor is it any investment advice. I’m sharing this purely for knowledge sharing purpose and to get feedback to see where I can improve on my analysis. Please remember to do your own due diligence and study before making any decisions.

With that out of the way, let’s get to it:

Information we have so far (publicly available):
ASP of a CRM is roughly RM 70k, and that recently the ASP of CRM had increased by 30%, meaning roughly equal to RM90k.
Maintenance fee, per annum, per machine, is roughly 10-12% of the ASP.
Warranty period is 1 year; thereafter each machine will enter maintenance period.
Management seems confident to hit pre pandemic sales target of around 500-600 CRM machines per year.
BPO segment recently achieved an award from Maybank for outbound cheque processing for RM 105mil over 7 years, or RM 15mil a year.

Key assumptions and variables:
- OPENSYS will get a maintenance contract for every machine they sell and install.
- All hardware revenue is purely from sale of CRM machine
- All maintenance revenue is purely from maintenance of CRM machine
- BPO revenue will remain stable and flat, in spite of the recent award from Maybank.
- SmartCIT also to remain flat at RM 3.5mil in spite of their just completed implementation for TNB.
- Management manages to hit pre-pandemic targets of 500-600 CRM machines sold.
- Margins remain the same

There are a few ways we can try evaluating this company by playing with the variables.

Let’s just start with a simple scenario:

Hardware revenue in FY23 was RM 20.5mil. Assuming each machine cost RM 70k, this means there were around 300 machines installed in FY23, and 10% maintenance fee = RM 2.5mil.

500 machines to be installed in FY24 x RM 90k ASP = RM 45mil.

10% of RM 45mil = RM 4.5mil increment in recurring revenue in FY25.

FY23 services revenue is RM 68mil, including BPO and SmartCIT—therefore maintenance revenue is estimated at around RM 44mil. This implies that FY24 recurring revenue could reach around RM 46.5mil and total services revenue to be RM 70.5mil and, in an ideal world, every year after that will see their recurring revenue continue to increase by approximately RM 4.5mil. To note, this segment has GPM of around 43% vs the hardware sales with GPM of around 17%.

Therefore, we can make an assumption that;
FY25 Estimated Revenue = 45 + 75 = 130mil
PAT Margin of 12% = RM 15.6mil
15.6/445 = 3.5sen EPS

Things that we can play around to test other scenarios:
Hardware: Adjust the number of machines sold, ASP, between 400 to 600 and 70k to 90k
Software: Adjust maintenance fees between 10-12%; adjust contribution from other segments

Bearing in mind considerations:
Their historical ROE has always been over double digits for the past 10 years
The company has turned net cash a few years ago as they generate a substantial amount of Cash Flow, net of dividends paid out.
Old machines should be phased out after 7-8 years so the nett addition of new machines under maintenance should take this into consideration.
While management guided that there are potentially another 10k CRM machines to be installed in the market (to replace ATMs and CDMs), there's no certainty that there will always be demand for new machines.

What points did I miss? How would you improve it? Let me know!

Tagging people who had shown interest in OpenSys on Stockbit before

@jiaming8yap @mshumts @kahliong