$BBW.SI – Azeus Systems Holdings Ltd
LONG | Early-stage SaaS/IT Services company | Small Cap | 4,3x EV/NTM Rev | CEO with skin in the game | 80%-100% upside
First of all, I recommend reading the analysis of Fairlight Capital, which has been the inspiration for this thesis:
https://www.fairlightcapital.com/_files/ugd/a6cb30_3a5c8e14da1745c08fc008f3f8adb5d2.pdf
1. ABOUT
Azeus Systems Holdings Ltd., an investment holding company, provides information technology (IT) products and services in Hong Kong, the United Kingdom, Australia, New Zealand, North America, the Middle East and Europe, and internationally. It operates through two segments, IT Services and Azeus Products. The company's application services include application development and packaged application maintenance and support; custom IT/application outsourcing services, such as custom-built application maintenance and support; and application portfolio management services.
Its business process outsourcing services include business process management and business technology solutions; and consulting services, such as IT strategy formulation and planning, technology selection and planning, feasibility study, technical study and infrastructure planning.
In addition, the company offers solutions such as AzeusCare, an integrated system for the management and delivery of social care; Convene, a mobile application for meetings, document access and collaboration; the Electronic Registration System, a web-based document management solution; CENTROPURCHASE, an online system for the purchasing process; and ICUBED, a proprietary technology solution for access to intellectual property information. In addition, it offers system implementation and enhancement services.
The company was founded in 1991 and is based in North Point, Hong Kong. Azeus Systems Holdings Ltd. is a subsidiary of Mu Xia Ltd.
2. BUSINESS MODEL
IT Services
The IT Services segment offers system implementation services, hardware and software sales, and maintenance and support services. A large % of this segment's revenues are derived from contracts with public entities and agencies in Hong Kong. These contracts run for several years and are coupled with implementation and maintenance contracts that generate recurring revenues.
Software design, engineering and related services are performed from the Azeus office in Manila, Philippines. Following its offshoring project, Azeus also has new software engineers in India.
The most recent example of such a contract was signed in January 2021 with the Hong Kong Police Force to design and develop the force's new personnel integrity monitoring system. In July 2020, Azeus was awarded a contract to design and implement a pilot e-tendering system for the Office of the Chief Information Officer of the Government to act as a single electronic platform for all Hong Kong Government tenders.
Azeus Products (SaaS)
The Azeus Products segment offers proprietary software products that are delivered in the cloud and generate upfront implementation fees and recurring revenue from annual licences.
Azeus Products are:
· Convene
Azeus Convene is a software for virtual meetings, calls and video calls focused on the professional environment. Convene combines applications such as mail, calendar, documents, surveys, electronic signature, etc. within the same programme. In addition, it includes a presentation participation system that allows users to modify, create notes and interact on the document presented by another user. At the end of 2021, Azeus will partner with Microsoft to implement the Convene app in Microsoft Teams, achieving an integration of the different Microsoft Office apps within the same "Convene in Teams" system. With this partnership, Azeus hopes to expand its user base.
· AGM@Convene
AGM is a software for virtual shareholders' meetings. With the same functionalities as Convene, AGM@Convene offers a more specialised service for meetings, reunions, committees, etc. Convene AGM facilitates and streamlines the process of an annual shareholders' meeting in all its phases (Pre-AGM, AGM and Post-AGM).
· AzeusCare
AzeusCare is an integrated software that offers a wide range of solutions for the management and delivery of social care. AzeusCare is currently used to manage the UK Care Act 2014, a UK local authority policy for the support of people with fewer resources.
Of these 3 products, AzeusCare is the most residual with Convene and AGM@Convene being the company's flagship products. Azeus' own software product segment has been growing rapidly in recent years and as of 2018 has managed to become profitable and also without needing external funding to do so.
Therefore, Azeus Systems combines a stable business with the IT Services part, with contracts with public entities, where its expertise (track record of +100 completed projects with +40 Hong Kong Government departments) is growing and facilitates the winning of new contracts. This segment is not expected to grow strongly in the future, but its high and stable operating margin (around 30%) makes it a great cash generator that can be leveraged to invest in the Azeus Products segment.
On the other hand, we have the SaaS segment, where Azeus is at an early stage with high and fast growth, with stable recurring sales (switching costs and network effect) that make the business already profitable. Unlike most SaaS companies, Azeus does not need debt to grow. Another competitive advantage of Azeus is the offshoring of its workforce, being mainly concentrated in the Philippines where the average salary of a software developer is $9,000. Finally, Azeus has proven to have a very flexible business model, being able to launch AGM@Convene in less than one working month. This was achieved by moving more than 100 workers who were developing other projects to the AGM@Convene project. In July 2020, 3 months after its launch, AGM@Convene was used in 100 annual shareholder meetings and in summer 2021 it surpassed 400, being the main player in Singapore.
3. MANAGEMENT / OWNERSHIP
The most important person in Azeus Systems is Lik Lee Wan, founder, CEO and major shareholder of the Company. Prior to founding Azeus in 1991, he was Manager of Oracle Systems (Hong Kong). In 1990, Mr. Lee was a project team leader at Versant Object Technology Corp. (now Versant Corporation). He was also a researcher at Microelectronics and Computer Technology Corporation in the United States from 1987 to 1990. Lee Lik Wan holds a bachelor's degree in Computer Science and Engineering and a bachelor's degree in Mathematics from the Massachusetts Institute of Technology (MIT). He also holds a Master's degree in Computer Science from the University of Texas. Mr. Lee is a Fellow of the Hong Kong Institution of Engineers and a former Chairman of its Computer Division. He is also a member of the British Computer Society and the Institution of Engineering and Technology. As at 4 June 2021, Lik Lee Wan held 72.67% (indirectly through Mu Xia Ltd) of the shares of Azeus.
The second largest shareholder of Azeus is Wan Lam Pui with 9.77% of the shares. She is currently the HR and Administration Manager. Prior to joining our Group, Ms. Lam was a teaching assistant at the Chinese University of Hong Kong. She holds a Bachelor of Arts degree from the University of Minnesota.
The majority shareholders control 82.44% of the total shares of Azeus Systems. Therefore, the free-float is 17.56%. With such a small percentage of shares available to the public, one might think that there is a high risk of the company going private, but it should be noted that Singapore has very strong rules regarding the defence of minority shareholders:
"Under the revised rules of the voluntary delisting regime implemented in July 2019, a delisting application will require the voluntary delisting resolution to be approved by a majority of at least 75 per cent of the listed company's total number of issued shares (excluding treasury shares and subsidiary holdings) held by the shareholders present and voting at the general meeting. Although the 10 per cent blocking threshold has been removed, the offeror and parties acting in concert with it are now required to abstain from voting on the resolution, ensuring that the offeror and its concerted parties will not be able to vote and force a delisting through."
https://thelawreviews.co.uk/title/the-shareholder-rights-and-activism-review/singapore
4. NIDUSTRY / PEERS
IT Services
The Azeus Products segment is the most promising segment for the Company, with good margins and high growth potential. The Board Portals industry will grow at a 17% CAGR from 2022 to 2027 according to the Industry ARC study. According to Research Nester the Board Portals market in 2021 was $3.3 B and is expected to grow to $11.6 B by 2029.
But what exactly is a Board Portal? A Board Portal is a system that secures and completes web-based jobs that will be used to facilitate management meetings, communication and collaboration between directors and the board of directors. In addition, it is used to provide content to directors on mobile devices or on different websites. As cybercrime is increasing rapidly, the demand for a secure board meeting platform has increased widely. In addition, board software offers the highest level of security, as it uses the highest level of encryption and security applications to limit access to confidential documents, chats and emails. In addition, companies are showing increasing interest in meeting management software as they have moved from paper-based formats to the planning, delivery and retrieval of all digital board materials.
The main players in the industry are: NASDAQ, Diligent, On Board, Azeus Convene, Dilitrust, BoardPac, ContractZen, among others.
Diligent is the industry leader with a turnover of $500M and estimated Enterprise Value of $7B (14x Revenue) according to Crunchbase. It has more than 1000 employees and is not a listed company. Since its foundation in 2001, Diligent has been very active in M&A processes, acquiring 12 companies, the last one, Insightia in January 2022. Diligent is ready to integrate with Zoom and Microsoft Teams.
According to Getlaka, the Nasdaq BoardAdvantage solution achieved $2.4m in revenue (the figure may be incorrect, sales are likely to be higher) in 2021 with a total of 250 customers.
OnBoard, another of Azeus Convene's major competitors, achieved $24m in revenue in 2021. In addition, it raised $100m in a financing round. Its estimated enterprise value is $400m (16.7x revenue). One of the advantages of OnBoard is its integration with Zoom and MS Teams. In August 2021, OnBoard acquired eSCRIBE, a software focused on public sector meetings and committees at 15-20x revenue.
https://www.softwarereviews.com/awards/data-quadrant-awards-2021-board-management
https://www.g2.com/categories/board-management#grid
As can be seen in the quadrants above, Azeus Convene is one of the top rated Board Management software by users and experts.
Another important question to ask is: is it possible for Zoom, Cisco, Microsoft to create their own Board Portal Management software and thus take over the business of Azeus, Diligent, OnBoard, etc.? In my opinion, it is not profitable for these companies to create their own Board Portal because it would not create value for the user who already has the apps of the main players and it is difficult for them to change board portal software when they have already learned to use the apps. As we have seen above, Diligent and OnBoard have integration with both Zoom and MS Teams, which is an advantage over Convene, which only has integration with MS Teams. Undoubtedly, the development of Convene integration for Zoom would be a very positive move for Azeus.
5. FINANCIALS / VALUATION
Azeus Systems is a company with stable sales with 2 very different segments: on the one hand, the IT Services segment, which is the "cash cow" business line of Azeus, with stable revenues, without much growth, but with very good margins. On the other hand, the SaaS segment, which is at an early stage and is expected to grow strongly with very high margins as we will see below. In addition, Azeus has a net cash of HKD 170 million (H1 2022), which is a big competitive advantage over competitors. Azeus is growing strongly without the need for financial debt. This is mainly due to a low-cost (offshoring of employees reduces staff costs) and flexible operating model.
In order not to extend the analysis, I will leave several links at the end so that you can see on your own the full financials of Azeus at a historical level.
Moving on to the valuation, we will follow the method used by Fairlight in its analysis. We will make an accounting adjustment in order to have a true Income Statement of the company. The financials reported by Azeus treat R&D and Sales & Marketing as expenses, but in a SaaS company we believe it is better to treat them as Capex. For more info I recommend going to the Fairlight analysis and see the difference between the reported Income Statement and the Actual Income Statement.
For the valuation we will take into account 3 scenarios (Bear, Base and Bull) and we will make a forecast from 2022 to 2026. To be conservative, we will take Fairlight's estimate as Bull (actually they only forecast 2022). Below are the "Real Income Statements" for the 3 scenarios with the assumptions taken for each of them:
Like Fairlight, to compare the SaaS segment of Azeus we will take as a reference the Cloud SaaS business sector and we will take @jaminball's analysis of the Substack "Clouded Judgement".
which publishes very interesting information on this sector every week.
To begin with, let's compare the Operating metrics of the SaaS cloud sector with those of Azeus Products. As shown in the table below, Azeus outperforms in all KPIs in @jaminball's analysis:
In terms of multiples, as can be seen in the chart below, the last month has been tough for valuations of these types of companies which has caused multiples to shrink quite a bit.
Despite this, we see that Azeus Covene remains at low multiples against its peers:
By way of summary we will take the multiples mentioned above and see what potential for appreciation Azeus has at the current share price of SGD 7.29 under the different scenarios:
Finally, we have also valued Azeus with a DCF model. As with the valuation multiples above, we have been conservative, taking the 3 scenarios mentioned above. Below is the sensitivity analysis of the return on investment taking the current share price of SGD 7.29 as the benchmark.
6. WHY IS IT CHEAP?
Hay 3 razones principales:
SmallCap (218 SGD million = USD 160 million) listed in Singapore, but operates mainly in Hong Kong and the Philippines.
Unknown company, no analyst coverage.
It is a very illiquid stock as there is one controlling shareholder = 82.44%.
7. CONCLUSIONS
Azeus Systems can be a great play for investors who are looking for
A company that combines a stable business line with 20+ years of experience and an early stage software company.
SaaS company that is already profitable and does not need debt to grow.
CEO with skin in the game (82% equity)
Very flexible company, able to adapt very fast to changing situations (AGM@Convene)
With today's valuations (04/02/2022), we will probably see some downward movement in the Azeus share price due to the market's punishment of this type of company. A good entry would be below 7 SGD/share with which we could obtain a return of 80%-100% starting from a very conservative valuation.
8. SOURCES
Azeus Investor Relations: https://www.azeus.com/investors/
Research Nester:https://www.researchnester.com/reports/board-portal-market/3141
Covene in Teams (news): http://www.businessmole.com/convene-launches-exciting-new-software-for-board-meeting-management-within-microsoft-teams/
Azeus Convene: https://www.azeusconvene.co.uk/teams
Diligent (Crunchbase): https://www.crunchbase.com/organization/diligent-board-member-services
Nasdaq BoardAdvantage (Getlaka): https://getlatka.com/companies/nasdaq-boardvantage
OnBoard (Getlaka): https://getlatka.com/companies/onboard-meetings
Shareholders Law Singapur: https://thelawreviews.co.uk/title/the-shareholder-rights-and-activism-review/singapore
Market Screener: https://www.marketscreener.com/quote/stock/AZEUS-SYSTEMS-HOLDINGS-LT-6811591/?type_recherche=rapide&mots=azeus
TIKR: https://app.tikr.com/stock/financials?cid=12096876&tid=20116387&ref=2hmlpx
Yahoo Finance: https://es.finance.yahoo.com/quote/BBW.SI?p=BBW.SI&.tsrc=fin-srch
Convene vs Zoom: https://www.azeusconvene.com/articles/board-portals-and-video-conferencing-in-board-meetings
Twitter: $BBW.SI : https://twitter.com/search?q=%24BBW.si&src=typed_query
SoftwareReviews Quadrant: https://www.softwarereviews.com/awards/data-quadrant-awards-2021-board-management
G2 Quadrant: https://www.g2.com/categories/board-management#grid
9. DISCLOSURE
As of today (02/02/2022), this company represents a small percentage of my portfolio. I have written this article on my own account and it expresses my views. I have received no compensation for it. I have no relationship with this company or any of the companies mentioned in the article. The financial information has been obtained from different sources such as TIKR, Market Screener, the annual accounts of the different companies mentioned, etc. Finally, this article is not a buy recommendation.