silverlake axis price slashed a quarter by anonymous report 1107422015

A 42-page report floated by an author known only by the name ‘razor99’ triggered a massive sell-off Friday in the shares of Malaysian head-quartered and Singapore-listed software company Silverlake Axis Ltd (SGX:5CP).

After the short-selling sagas in Olam International Ltd (SGX:O32) and Noble Group Limited (SGX:N21), will Silverlake be the next stock to bite the dust?

The stock fell 24.4 per cent to SG$0.635 on Friday after news of the report surfaced, compelling company management to request a trading halt on the Singapore Exchange, pending an announcement. Earlier during the day, the Singapore Exchange asked the company whether it could shed light on the unusual and high-volume trading in the counter.

The report dated August 20 issued by ‘razor99’ recommends that investors short the Silverlake stock at its (then traded) price of SG$0.84 for a target price of SG$0.29, i.e., for a profitable downside of 65 per cent. The news of the report was first broken by www.valuewalk.com

“On paper, SAL appears to be an investor’s dream, providing consistent growth, high returns, strong cash flow, and a steady stream of dividends,” says the report. “However, we think SAL will prove instead to be an investor’s worst nightmare, like other fraudulent IT service companies Longtop Financial (China) and Satyam Computer Services (India).”

The report alleges that Silverlake’s founder and chairman Goh Peng Ooi has been able to line his pockets with more than US$300 million (SG$423 million) through stock sales and dividends facilitated by inflating the company’s reported results using “a complex web of multi-, private companies connected to SAL, the listed entity.”

According to ‘razor99’, one indication of such padding of profits is the exceptional profitability of Silverlake as evidenced by the dramatically higher (“more than 50 per cent”) revenue per employee compared to its software peers.

“We believe that some or all of the related party revenue is fictitious and is used to inflate SAL’s reported profits,” says the report. “Frequent share placements likely help Goh fund the fictitious related party revenue through his private companies.”

‘razor99’ observes that although reported revenue and net profit have risen at a fast clip due to such related party transactions, Silverlake’s EPS has only increased at a 5.4 per cent CAGR due to “frequent dilutive related party deals.”

The report alleges that fraud was perpetrated on Silverlake’s minority shareholders by making them pay unreasonably high prices for businesses whose profitability was propped up by Goh prior to injecting them into the company. “Minority shareholders have contributed more than US$165 million of net capital into SAL,” observes ‘razor99’.

In addition, these minority shareholders would likely face the brunt of unreported contingent liabilities represented by “large related party Silverlake private companies which are loss-making with negative shareholders equity, and which only continue to operate with an explicit guarantee of financial support from Goh,” when these came home to roost.

‘razor99’ also accused Silverlake of not disclosing off-balance-sheet debt at the time of its IPO. “If Goh was willing to hide contingent liabilities at that time, we worry that hidden off-balance-sheet and recourse debt may still exist in some Silverlake group companies,” warns the report.

Though ‘razor99’ has set a price target of SG$0.29 per share in Silverlake, they do not rule out the possibility that the stock could ultimately plunge to 0.