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Hitachi eBworx

August 25, 2007

eBworx Continues to Win Contracts in Niche Market

Petaling Jaya, 25 August 2007 - MESDAQ-LISTED eBworx Bhd, an IT solutions provider that has found a niche in the banking sector, does not quite have an avid following among investors because its sector is currently not part of a stock market concept play and it does not boast of big-name shareholders.

Nonetheless, its ability to keep winning contracts means that analysts cannot completely ignore the stock.

The company's business prospects over the next four years, aided by the implementation of the Basel II international capital framework for banks, look pretty exciting. More importantly, it continues to deliver in terms of financial results. And sometimes, isn't this all that matters?

For its six-month results to June 2007, it was obvious that the company's efforts to improve its bottomline have paid off. Revenue increased 36% to RM21.9mil while net profit jumped 58% to RM6mil. Earnings per share for the period amounted to 2.62 sen.

As the bulk of the company's profits normally comes in the second half of the year, don't be surprise to see a doubling of net earnings later this year.

In terms of the topline, eBworx group chief executive officer Tan Suan Fong says the company has historically grown by an average of 30% per year.

eBworx reported RM33.8mil in revenue in 2006. A 30% growth would suggest a revenue of RM44mil this year. Based on the margin of 28% for the last half-year period, the company should thus be able to generate a net profit of RM13.2mil, which is a doubling of the bottomline from the first half of 2007.

If this were indeed the case, based on the share price of 48 sen, the stock would be trading at a price earnings ratio of about 8.42 times, which is relatively cheap when compared to those of other Mesdaq companies.

So far, says Tan, 80% of the company's sales are derived from repeat customers. “This (the 30% growth) should be achievable even if based only on the orders in hand. Every year, we add at least two to three clients to our customer base,” he adds.

“We got two earlier this year, and we are looking to get another one in the next few months.” At present, eBworx has orders amounting to approximately RM40mil. It generates new sales of between RM10mil and RM15mil every quarter.

Focus on Margins

Back in 2004 and 2005, eBworx's strategy was to actively pursue market share at the expense of margins. This resulted in lower profits and escalating costs. Its 2005 pre-tax profit was halved to RM3.1mil although revenues fell by less than 2% to RM36.6mil.

In 2006, the company felt that it had garnered enough market share, and decided to focus on improving its bottomline, for instance, by offering higher value-added products that yield higher margins.

Hence, even though its 2006 sales were 7.3% lower, eBworx managed to catapult net profit by 138% to RM7.6mil, which is even higher than the RM6.1mil recorded in 2004.

eBworx is now focused on expanding its IT-managed services and enhanced services to further strengthen the company's recurring revenue stream. Just last year, the bulk of its revenue was derived from its core business of licensing fees and professional services, which Tan says have lower margins and are less recurring in nature.

For the first half of the year, the company derived 40% of its sales from licensing fees and professional services, about 15% to 18% from maintenance charges, 30% from enhanced services and the remainder from managed services.

The company has teamed up with SpringTrax Sdn Bhd to form SpringWorx Technovations Sdn Bhd, a 50:50 joint venture to develop trade finance solutions.

Tan says that this alliance is already drawing many prospects from across the regions. The three major factors that drive the demand of eBworx’s trade finance solutions are technology revamp, lower total cost of ownership and better workflow processing.

Regional Network

At the moment, eBworx has about 30 clients all over South-East Asia. In Malaysia, it offers its services to the seven local banks and two foreign banks. The biggest catalyst for its growth is the requirement for Asian banks to meet the Basel II requirements by 2010.

The implementation of Basel II is expected to drive banks to further automate their processes with banking software offered by vendors such as eBworx.

“In Malaysia, there are no similar solution providers such as us. We have competitors in the US and Europe, but it is difficult for them to penetrate the market here because our loan structure is very different. In Asia, the structure is rather complex, while in Europe and US, it is much simpler,” says Tan.

He adds that the structures in Asia, Africa, India, South America and the Middle East are quite similar.

Meanwhile, central banks in this region have mandated banks to be Basel II-compliant, which means the banks’ software must generate quality credit data, enforce credit policies through automation and manage operation risks through tighter controls of loan approvals.

“In today's world, banks are getting more competitive and are trying to decrease their cost per head count. To remain competitive and relevant, the banks are increasingly shifting to electronic platforms to cut costs and cater to online customer needs,” says Tan.

For those not familiar, eBworx is a regional financial solutions specialist that provides an array of digital commerce solutions to the financial services industry. These include software products, technology consulting and systems integration services that enable financial institutions to improve their sales operational efficiency and manage credit risk.

Prospects

Hwang-DBS Vickers Research has a Buy call on eBworx, and expects the company’s earnings to jump 93% and 34% in 2007 and 2008 respectively, driven by Basel II requirements, sales of higher margin products and cost controls.

It notes that eBworx is able to generate more than RM10mil in sales per quarter or a total of RM43mil this year, up 29% from FY2006. “This is driven by increasing IT spending by banks, stronger track record through rising number of references, repeat orders and new product launches,” it said.

It added that the risks of reduced IT spending by banks due to slower economic growth would not greatly impact eBworx as banks were more willing to invest in such solutions to help them generate more sales and lower costs.

At present, eBworx is in Malaysia, Singapore, Indonesia, Hong Kong, the Philippines and Thailand. It is looking to gain a foothold in Vietnam. Tan says that the next 12 to 18 months should see strong demand for its products and services.

eBworx has five wholly-owned subsidiaries – Digital Nervous Systems Sdn Bhd, eBworx International Pte Ltd, eBworx Technology (Chengdu) Co Ltd, eBworx Technology (Beijing) Co Ltd and eBworx (Indo-China) Co Ltd.

OSK Venture Equities Sdn Bhd, a venture capital company of OSK Ventures International Bhd, has a 20% stake in eBworx, while CSE-Infotech Ltd, a wholly-owned subsidiary of CSE Global Ltd, which is listed on the Singapore Exchange, is the other substantial shareholder with a 28.9% stake.

Source: As reported in “The Star”, by Tee Lin Say