Spotlight: Paxys, Inc (PAX)

Business Overview

Paxys was originally into ceramics manufacturing way back in the 50s (Fil-Hispano Holdings, Inc) before closing down its operations in the early 2000s.   The company now focuses into investments in the Business Outsourcing Industry (BPO) industry with diversified services such as contact centers, data conversion, salary packaging and software solutions.

Paxys is the first call center firm listed in the PSE after a reverse takeover by Advanced Contact Solutions, Inc (ACS), injecting 100% of the business into PAX in 2004.  However, on January 2011, PAX sold ACS to Alorica International, Inc.  The Salary Packaging business is also being divested.

Major stockholder of this firm at 73.23% stake is All Asia Customer Service Holdings Ltd, a company incorporated in Hong Kong.

Business Segments

1.) Call Center - inbound and outbound teleservicing including email and web-based tools.
2.) Salary Packaging - services that effectively structure employee income through a combination of cash and approved benefits.  Implementation of a well-aligned salary packaging policy and delivery of a comprehensive tax management reporting suite.

3.) Data Transcription - data transcription and scoping services, voice-to-screen message conversion and electronic data encoding and processing.

4.) Others - software development and IT consultancy; Parent company operations 

Significant Subsidiaries

1.)  Advanced Contact Solutions, Inc (ACS) - divested and sold to Alorica International

2.) SmartSalary Pty Ltd - indirectly owned through Paxys A.U., which is currently classified as disposal group held for sale.

3.) Scopeworks Asia, Inc (SWA) - Data transcription

4.) Paxys Global Services (PGA) - Headquarters based in the Philippines

5.) Ubaldo Reidenbach Solutions, Inc (URSI)- (63.5% stake) IT, software development, licensing and consultancy

6.) Stellar Global Solutions Philippines, Inc - Joint Venture (50%) ; call center  

7.) ACS Dalian - Joint Venture (50%); call center; declared as property dividend to Parent company

Based on the Business Segment Information from AR2011, net income losses are incurred through ACS while the Salary Packaging segment (SmartSalary) has been an income earner.  So, it turns out that PAX divests from the losing business and wants to veer away from Australia.  Remaining external revenue would come from China through ACS Dalian.

Quick Numbers

Fundamentals

Book Value of Equity (1H 2012): ~Php4.35B

Outstanding Shares: ~1.15B

BV/share: Php 3.78


Debt Ratio (Long term): 0%
Beta: 0.74
Cost of Capital: 9.9%


Net Income:  
2012 (1H):  Php 25.65M (excluding non-recurring income from sale of subsidiaries)        
2011:  Php 124.04M      
2010: Php -270.88M    
2009: Php 236.882M    

time-weighted average NI: 16.98M


Assuming conservative long-term growth (3% yearly), fair value for the company based on earnings (DCF analysis) would be around:

Fair Value/share: Php5.42  

Book value of equity per share is also attractive as it went up coming from just around 2/share in previous years;  this is due to the sale of subsidiaries.

Latest price as of 8/31/2012 is 2.85 which gives us around 90% upside to conservative fair value of 5.42.  Although the numbers look very good, the question now would be, where will all the proceeds of the Sale go?  PAX business strategy remains to be unclear for now.  We are still waiting for the minutes of the ASM; however, recent stock prices show a negative reaction.  

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Technicals

Something in the ASM must have turned off shareholders last August 31.  As seen on the chart, there has been a selldown right on the day of ASM, breaking the lower Bollinger band with considerable volume.  MACD chart does not help at all  with the breaking of the Zero line.  Stock's price would range trade at best for now, from 2.73 to 3.3.

Analysis

PAX may seem to be undervalued today; however, future prospects are still vague.  At least for now, all debts have been paid and there have been reported new JVs to be formed. 

It may not still be a good time to enter as shown in the charts.  I currently hold PAX in my portfolio and I plan to average down when the prices are stable.  For now, I would say this is a BUY ON DIPS.  

References: Financial Statements of PAX (2Q 2012, AR 2011, 3Q 2011)
                    www.pse.com.ph