Azeus Systems Holdings

Summary

Highlighted by Farlight Capital in 2021, Azeus Systems Holdings is a 182m US dollar market cap traded on the Singapore stock exchange that has two business lines: IT service business, and a SaaS products business. The company has invested R&D into growing its SaaS products business and has shown explosive growth in over the last five years representing 69% of revenue in FY23. The company trades at ~3.5x EV/Rev for 2024 where larger software peers trade at around 12x, growing EPS 32% CAGR over the past 5 years. The company has 20% fcf margin, net cash, and pays out 100% of fcf as dividends. The company’s founder and CEO, Lee Wan Lik, owns 80% of the shares outstanding and has been successful at growing different verticals of SAAS business products to serve it’s worldwide clients. In 2022, the company won a big contract to implement Convene Records for the HK government where 75% of the revenue is derived from the high margin licensing fee side of the business. The financials have started to inflect in 2024, and in the first half of FY24, the company grew net income 35% over the previous period. Given the company usually pays out all its net income as dividends, declaring a large dividend increase in 2024 should move the stock higher this calendar year. The company checks a lot boxes:

-Owner operated

-Recurring revenue

-Strong top and bottom line growth

-pays out all profit as dividends

-Inflecting financials FY 24

-Large runway for SaaS products

-23x LTM earnings. Mid teens NTM

Azeus has been investing in R&D to grow its digital corporate governance solutions to include Convene, Convene AGM, Convene ESG, and Convene Records. They have been highly successful in rolling out new product innovation and have publicly stated they will take Convene Records to market after the Hong Kong implementation. The growth in the SaaS products business adds to the TAM, adds stable recurring revenue, increases gross margins, and enables Azeus to expand into new geographies and markets. According to the CEO, this is all by design:

The product business provides the company with high quality recurring revenue and is now a significant contributor. We will continue to invest in our product business line. We are investing in R&D to strengthen our current products and to seek new innovations. We are also expanding earnestly into new territories whilst deepening our market presence in high growth regions. We continue to invest in marketing and adding engineering capacities”

So you have a relatively small software business growing high margin recurring revenue at an above market clip and growing both the product offering and expanding geographies. The company has been highly successful so far in building a track record of growing free cashflow >30% and distributing all profit as dividends with no capital invested. The company has a stable share count and no SBC so all growth is equivalent on a per share basis. Given transformation to a SaaS software company over recent years, the think the company is underpriced by a factor of 2-3 and possibly more.

The board portal market is in the early innings of growth given technological innovations of recent years. Although there are other competitors, Azeus has a 30 year track record of successfully managing software projects and has a low cost operating model due to recruiting engineers from low cost countries such as the Philippines and India. According to the CEO,

“Securing proficient IT personnel is a top challenge for the Company. To address this, we have made strategic investments by establishing new centers to tap into global talent pools. Our new engineering centers in Malaysia and India coupled with growth in the Philippines reflect our commitment to nurturing engineering resources. In recent times, we have observed a gradual improvement in the talent market, especially over the last six months.”

Why is the company cheap? The financials are excellent, but there are couple of factors that weigh on the valuation. Given the CEO and insiders own the majority of the company, Azeus has an about 17% free float so there is little stock to go around. The company relatively illiquid and hard to buy for institutional investors. The company is listed on the Singapore exchange but has global operations and lists financials in HK dollars. The discrepancy between U.S company valuations vs the rest of the world is very wide at the moment especially when looking at software multiples. The performance of U.S. mega cap tech is sucking up capital, but if the situation ever reverses and small cap foreign stocks catch a bid, Azeus stands to benefit given the high quality characteristics of the company. Even with no multiple expansion, dividend + eps growth equals very high total returns in its own right with very little cyclicality. The stock has been up enormously over the past five years, but the stock is still cheap and has large runway to grow relative to the market cap size. I will following Azeus closely in the future.

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