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Monday, June 22, 2015

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 ..

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