August 12, 2006
Kuala Lumpur, 12 August 2006 - eBworx Bhd is one of the the least celebrated companies on the Mesdaq market of the Bursa Malaysia. Since its flotation exercise in end 2003 the company, which specialises in financial solutions for the banking and financial sectors, has rarely been in the glare of publicity, its officials opting to keep a low profile concentrating on laying the foundation for a brighter future.
In this two-year period of silence however, much of the groundwork for eBworx future plans has been put in place with new investments and new markets.
In FY05, eBworx's net profit fell by almost half to some RM3mil.
However, the company’s chief executive officer Tan Suan Fong says that this is a thing of the past; he remains optimistic about the group's future performances.
He explains the difficulties, which the company endured last year.
“In 2005 we expanded into a lot of markets - China, Thailand etc. So when you penetrate a new market, the margins you make will be low, as you need to customise your software to suit the local needs.
“When we go into a new market, the training of staff will take about 6 months, you need to translate material, you need to understand their culture, and the way the particular bank does business. So in the initial phase the company will be libernating, and it’s not cheap mind you... It can burn you by about RM1mil to RM2mil in each market easily.
“But this year 2006 is our harvest year. This year has been exciting, but in the coming 12 months you will see a lot more action as we have already passed the investment phase. Even if you annualise our earnings you can see the growth trend,” says Tan.
Better Earnings Prospects
For the first six months of the current financial year ended June, eBworx posted a net profit of RM3.8mil on the back of RM16.1mil in sales, which is a turnaround from the net loss of RM1mil from RM13.4mil in revenue suffered in the corresponding period a year ago.
“Last year was a disappointing year, but if you put that (last year) aside we actually have steady growth. From now, we will focus on reaping the harvest from what we have done over the past couple of years, and focus on businesses where the margins are much better, and where there is recurring income.
“For the past two years we already negotiated maintenance contracts with some banks, and typically the contracts signed are for five years.
“We are also looking at supplying people to manage (credit software) systems. For the banks there is no need to worry about paying EPF (Employees Provident Fund), looking at offering staff loans and what not. If we handle the people aspect of the business, it takes a load off the banks.
“There is also no need to train staff, so the banks can safe costs, while for us, our revenue is protected for a few years. It is recurring and the margins are all right...a win-win situation,” Tan adds.
eBworx strengths, Tan adds, lie in the fact that it has penetrated markets such as Thailand, Indonesia and China, the impact of which can be seen in the company’s earnings.
At present, as much as 30% of eBworx’s earnings is from the Malaysian market, while the remainder is evenly distributed between its Singapore, Indonesia and Thai ventures, while China is still in its infancy stage.
In Thailand, the company’s clients include the Thai Farmers bank, which is the most profitable bank in Thailand and the state owned Krung Thai Bank, which is among the most asset-rich banks in the country.
In Indonesia, Tan says, five out of the six largest banks are his clients. In China, meanwhile eBworx has a research and development office in Chengdu and a sales office in Beijing.
“We are looking at better years ahead. We have been actively exploring potential joint venture and mergers and acquisition candidates to secure large outsourcing deals in Malaysia and Indonesia, which should bear fruit.
"The bread and butter of banks is loans, so all banks have to spend on this sort of systems,” Tan adds.
New Markets and Business Potential
Tan says eBworx is not planning to penetrate new markets anytime soon and will stick to strengthening its position in the markets where it has already set foot. “We learnt our lesson in 2005. We learnt that it’s always good to take things one step at a time, so in the coming 12 months we may not look at any new markets. You cannot underestimate the cultural issue. It is not easy going into a new market is a highrisk issue,” Tan says.
However, he does not discount the possibility of the company venturing into the Middle East market.
He does however expect a jump in businesses largely as a result of the Basel 2, which is an initiative of the Bank for International Settlements – an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks and advices against fraudulent schemes.
Basel 2 focuses on several areas including improving the risk management practices of all compliant banks and is set to take off by as early as next year in some countries in the Southeast Asian region.
“This framework (Basel 2) minimises risks, all banks worldwide will have to comply with these requirements soon enough. In Malaysia by 2008 and in Singapore the compliance will be mandatory by 2007. So it could be good for us,” Tan adds.
Contrary to what many say, the consolidation in the banking industry has not dented eBworx earnings. There were many who felt that with the consolidation the company might have a tough time competing with other service providers with the smaller number of clients.
Tan says, “Even with the banking mergers, to our surprise, the business has improved, as banks need to revamp their IT (information technology) infrastructure. The more mergers among the banks, the better for us as our target anyway is the top tier banks. It's better for us if there are larger banks around.”
Undervalued
Since early January last year, eBworx shares have been trading below its initial public offering price of 33 sen. It ended trading on Thursday at 28.5 sen.
“Our PE (price earnings ratio) at FY06 is about 9 times, which is quite low. Our order book right now is slightly below RM30mil.
The IT industry may be a very competitive business but the good thing is that in banking, because the market is big enough, banks rely on IT a lot for competition purposes. They need IT for productivity and to improve the delivery channel.
“In this line the more references you have the better premium you can command, and the easier it will be for you to get new customers. So I do believe we have good prospects,” Tan says.
As at end June this year the company had net assets per share of about 24 sen, while its earnings per share for the period in review stood at about 1.8 sen a share.
According to the Altman Z Score model, which is commonly used to measure the likelihood of a company going into bankruptcy within the next two years, eBworx has a good “A” rating with a 5 point score, which means the company is in the pink of financial health.
Source: The Star, BizWeek: Companies & Strategies
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