Silverlake Axis Ltd - CIMB Research 2016-11-11: 1Q17 core earnings disappoint

Silverlake Axis Ltd - CIMB Research 2016-11-11: 1Q17 core earnings disappoint SILVERLAKE AXIS LTD 5CP.SI

Silverlake Axis Ltd - 1Q17 core earnings disappoint

  • 1QFY6/17 core net profit made up just 8% of our full-year forecast (vs. 20% historically for the first quarter).
  • A one-time gain of RM143.8m from the sale of GIT shares boosted reported profit.
  • A 0.5Scts DPS was declared for 1Q17.
  • The balance sheet was in a net cash position at end-1Q17.
  • Maintain Add with a lower target price of S$0.67 based on DCF (WACC 11.6%).


1Q17 core earnings fell 59% yoy 

  • 1Q17 core earnings made up just 8% of our full-year forecast (vs. 20% historically for the first quarter). Revenue fell 3% yoy in 1Q17. The company also recorded net unrealised foreign exchange gains of RM1.9m and a gain on sale of its GIT shares of RM143.8m. Excluding these two non-recurring items, core net profit fell 59% yoy.
  • Income tax expense was higher on a yoy basis due to the withholding tax accrued for the proceeds on the sale of the GIT shares.


Software licensing sales declined 

  • Software licensing sales fell 27% yoy and software project services revenue fell 59% yoy. Given that software licensing revenue enjoys a gross profit margin in the 90% range, the group’s 1Q17 gross profit margin fell to 58% (1Q16: 60%). 
  • Maintenance and enhancement services grew 27% yoy while insurance processing services grew 19% yoy. Both segments command gross margins in the 60% range.


Outlook 

  • Silverlake highlighted that financial institutions remain cautious on large IT expenditure, resulting in weaker demand for major core IT replacement or upgrades. 
  • Management expects the earliest that stronger spending in IT capex at banks may return could be in FY18. In the meantime, Silverlake is strengthening its capabilities in MES as well as expanding the market share of its previous acquisitions, Cyber Village, Merimen and Symmetri group.


Special dividend 

  • On 11 Nov, Silverlake announced that it had completed the sale of its shares in GIT. The group’s stake in GIT is now 14.1%. Aggregate cash proceeds from the sale was US$15m and the estimated one time gain was US$11.5m. 
  • We believe the cash proceeds will be earmarked to grow the Merimen insurance processing business as well as for a possible special dividend in FY17F. We have not factored any special dividend into our forecasts.


Maintain Add 

  • We cut FY17F core EPS to account for the slower business in the software licensing and project services segment. Our DCF-based target price falls to S$0.67 (WACC: 11.6%).
  • Potential re-rating catalysts include significant order win announcements, elimination of related party transactions and special dividends. 
  • Key risk is pullback in customers’ rollout schedules




William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.67 Down 0.680




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