Silverlake Axis down 24%, suspended, after damning report (2)

Silverlake Axis announced yesterday is quarterly earnings, like nothing has happened. Some more information can be found in this article in the Straits Times.

A bit unreal, since the company has not replied to the very serious allegations by "razor99". But may be the results were ready and planned, and it was considered to release the results anyhow, even though the anonymous report was not even mentioned once in the results.

In the Value Investors Club there is a member named "razor99" who has written a report before about possible fraud at Longtop Financial, allegations that proved to be right. In the introduction of the report on Silverlake Axis there is a reference made to this report. If this is indeed the same writer, then that would add to the credibility of the current report.

For those that have not found the time to read the whole report (it is rather heavy on accounting), a shorter version can be found here.

I have read the report several times, and have not been able to find errors in it. I have to admit, that I am not an expert on Silverlake Axis, I only started to follow the company more closely over the last few months after a tip of a friendly party.

Given that, some comments by me:

• The corporate structure is indeed horrific, and unexplainable so. Why does the group need so many subsidiaries, audited by so many different auditors, and even some in (notoriously non-transparent) BVI?
• The amount of RPTs (both revenue transactions and acquisitions) is very high (although recently less so).
• Transparency (in relation to the above) does seem to be a problem.

This is also determined by the Governance and Transparency Index of the NUS Business School, which put Silverlake Axis on the 507th place out of 639:

Why does a multi-billion company with a credible board of independent directors have such poor corporate governance standards, why did the board not insist on improvements? This is indeed a puzzle.

Another question is: why did SGX allow such a company to be listed in the first place? The company should have been forced to restructure pre-IPO, bringing under one umbrella all companies in the group with high RPTs.

On the other hand, the above considerations are red flags, but not really beyond the law.

In Section 5 undisclosed off-balance sheet debt is mentioned, with appendices 12-14 as proof. This allegation looks serious (at least to me), the company definitely needs to come with a good, concrete explanation here.

The report further suggests that because of this there might be more hidden loans. Silverlake Axis might want to give full transparency (beyond what is required) to show this is not the case, even in BVI registered related parties.

Section 6 gives an overview of the chairman cashing out (more than RM 1 Billion), and the minorities coughing up money (RM 555 Million). In itself there is nothing illegal about this.

This is however a very refreshing way to look at things, I hope analysts will follow this example, I suspect there are many other companies where the same has happened in the past. I hope to have time in the future to give some Bursa listed examples.

Section 7 gives a peer analysis. This is indeed quite disturbing for me, if the peers (as selected by Razor99) are typically for the industry, then this section does need some serious discussion by the company. The average salary for an employee is RM 111K, while the revenue per employee is RM 625K. With most revenue coming from project work and maintenance, these numbers do seem puzzling. A lot of the technology of Silverlake Axis even appears to be acquired, while spending little on R&D, not what one would expect from a top-notch technology company.

Section 8 about possible bribery is very disturbing, especially in the Malaysian context. But no conclusive evidence is given (which would anyhow have been impossible to do), although rumours have been going around for some time (I am aware of some of them, something I hardly ever hear).


SIAS announced a press release regarding the matter. It made a stunning comment:

"It is unfortunate that such an anonymous report can have an impact on the stock as it lacks credibility".

I honestly have no idea how anyone can be so sure. Also, why did the author make such a comment without going in any detail whatsoever?

"If the person or persons responsible for the report are found to be mischievous then the company must take prompt legal action and, if the facts indeed are found to be mischievous and misleading, SIAS calls also on the authorities to take police action."

Not one word what action should be taken if it turns out that (some of) the allegations turn out to be true.

"It is the small investors who always suffer the consequences."

Sorry, that is simply playing the gallery.

But what if the allegations are (substantially true)? Would this anonymous report not limit the damage, prevent more money from minority investors to be poured into the company while preventing the chairman of cashing out more money, and enabling the authorities to take action?

Also, it does give the independent directors a chance to improve things on corporate governance issues. Something that anyhow seems to be overdue.

"SIAS calls on all listed companies to be as transparent as possible to their shareholders to prevent such attacks from members of the online community who indulge in such attacks for personal gain. Companies must be prompt in responding to such attacks to ally the fears on the part of the investors and consequently avoid losses."

Finally something I agree with. But given that the company has been the target before, and its long listing history, has Silverlake Axis really been "as transparent as possible"? I strongly doubt it and NUS Business School seems to agree with that, placing the company in the last quartile of its CG list.

How this episode will play out, of course I don't know. It is a very high profile case, with lots of vested interest. The company has been recommended by many astute investors and its numbers did indeed appear very good. Will it turn out that the numbers were simply too good to be true? Time will tell.