While most value investors take interest in companies which possess quality assets that are undervalued by the market, there are investors who have a preference in asset-light businesses. An asset-light business model does not require large capital investment that involve physical assets. This allows the company to focus its limited resources on achieving the best returns by running its operations efficiently, which is also much easier to scale. Moreover, as not much capital expenditure is required, most of the profits can be reinvested into expanding the business or distribute as dividends to reward shareholders.
Perhaps the most commonly quoted example of successful asset-light businesses would be none other than Uber. Unlike traditional taxi-operators which own fleets of cabs and drivers, Uber simply offered a platform that brings together a private driver and a passenger and takes a cut of the revenue generated from the ride. Likewise, Airbnb would not have been such a success in a short period of time had it planned on building or buying hotels to compete against the larger hospitality groups.
That said, we identified three asset-light businesses listed on the Singapore Exchange that could potentially offer valuable investment opportunities to investors.
HRNetGroup claims to be the number one recruitment firm operating in 13 Asian cities, with approximately 20.5 percent market share in Singapore based on a Frost & Sullivan analysis done in 2017. In the last three years from FY16 to FY18, the group has achieved growth in its gross profit and normalized net profit at a compounded annual growth rate of 8.1 percent and 7.6 percent respectively.
In FY18, HRNetGroup achieved yet another record year in revenue with its top-line crossing the $400 million mark for the first time at $428.5 million. This was partially attributable to the acquisitions of REForce, HRnet Rimbun and Career Personnel completed in the second half of 2018. Meanwhile, the group’s two core segments registered stable growth with its professional recruitment segment placing 9,448 talents while the flexible staffing segment deployed an increased monthly average of approximately 12,112 contractor employees last year. Correspondingly, FY18 net profit jumped 16.7 percent year-on-year to $48.2 million.
HRNetGroup adopts an asset-light business model with no properties owned and minimal capital expenditure. As at 31 March 2019, the group holds $304.5 million of cash equivalents and $13.3 million of lease liabilities, putting it in a net cash position of $291.2 million and a financially strong position for acquisitions and business expansion.
The group declared a final dividend of $0.028 a share for the period FY18, which grew 21.7 percent from the $0.023 paid out in FY17. Based on HRNetGroup’s last traded price of $0.70 as at 24 July 2019, this translates to a decent yield of around 4 percent. Return on assets worked out to be at the high side at around 11.6 percent.
PropNex is the largest real estate agency in Singapore with leading market shares in private residential primary market, private residential resale market as well as HDB resale market at 42.4 percent, 34.2 percent and 50.3 percent respectively. The group is also the biggest property agency in Singapore by agent count with an estimated 8,008 salespersons as at July 2019. Apart from its core business of real estate brokerage, PropNex is also engaged in the provision of professional consultancy and services to property management as well as providing training courses for salespersons.
PropNex adopts an asset-light model without direct exposure to physical properties by owning them, but is well-enabled to ride on the benefits of property upcycles through the related services it provides.
Over the last four years since FY15, PropNex’s revenue grew at a CAGR of 31.8 percent to $431.5 million in FY18. This was attributable to increased commission income from both the agency services and project marketing services driven by the growth in the group’s sales force. Correspondingly, net profit rose at a CAGR of 40.5 percent over the same period to $23 million in FY18 (without taking into account IPO expenses).
PropNex’s cash and cash equivalents climbed 5.3 percent from three months ago to $79.7 million as at 31 March 2019 while holding zero debt in its balance sheet.
The group declared a final dividend of $0.015 and a special dividend of $0.02 a share, bringing full year payout for FY18 to $0.035. This worked out to a fairly attractive yield of 6.5 percent based on its last traded price of $0.535 as at 24 July 2019. Return on assets also stood relatively high at 13.7 percent.
Despite the cooling measures introduced in July 2018, management is of the view that the private property market segment is expected to remain active in 2019 with an estimated over 50 new project launches by developers. In the public housing segment, HDB resale transaction volume totaled 23,099 units in 2018 climbing 4.6 percent from 22,077 resale flats recorded in 2017. This reflected consistent growth and continuous demand going forward.
Silverlake Axis offers innovative software solutions and services to its customers in the banking, insurance, payment, retail and logistics industries. Today, over 40 percent of the top 20 largest banks in Southeast Asia run Silverlake Axis’s core banking solution. Notably, the group’s maintenance and enhancement services business which focuses on providing software maintenance support services to its clients, is recurrent in nature and contributes approximately 72 percent to the group’s revenue in FY18.
As some financial institutions in the region are increasing their capital expenditure on IT in 2018 after being cautious in the preceding two years, Silverlake Axis benefited from this trend and secured a number of new contracts. The group’s 9M19 revenue rose 23.1 percent to RM490.6 million underpinned by significant growth recorded in projected related revenue following the delivery of new and ongoing contracts. Correspondingly, net profit surged 82.1 percent to RM178.1 million. Profitability remains optimistic as Silverlake Axis continues to recognize progressive revenue over the next few quarters.
In terms of financial strength, Silverlake Axis maintained a healthy net cash position of RM348.5 million as at 31 March 2019, with RM430.6 million of cash balances and RM82.1 million of total borrowings.
Silverlake Axis declared total dividends of $0.012 and special dividends of $0.018 a share for the period FY18. Full-year payout of $0.03 translated to a yield of 5.7 percent with the group’s last market price of $0.53 as at 24 July 2019. Return on assets based on annualised 9M19 results held high at around 19.6 percent.