Silverlake Axis Ltd - 2QFY17 Only buy for special dividend
- 2QFY6/17 core net profit was below expectations at 10% of our FY17F. 1HFY17 core net profit was below, at 19% of our full-year expectation due to lower revenue.
- One-off non-foreign exchange-related gains amounted to RM391m in 1HFY17.
- 0.70 Scts DPS was declared for 2Q17.
- Balance sheet was in net cash position at end-2QFY17 (12% of market cap).
- We cut FY17F core EPS by 31% for lower revenue due to slowdown and deferment of customers’ orders. Our revenue cuts post-1QFY17 results were insufficient.
MES was the star in 2QFY17
- Silverlake Axis' 2QFY17 core net profit made up just 10% of our full-year forecast as revenue fell 29% yoy.
- In 2QFY17, maintenance and enhancement services (MES) revenue rose 12% yoy to account for 82% of total revenue.
- Insurance processing revenue increased 19% yoy, while other business segments registered double-digit decline.
- Gain on disposal of Global InfoTech Co. Ltd. (“GIT”) shares in 2QFY17 was RM223.9m. Excluding one-off gains, core net profit fell 69% yoy.
- We estimate cumulative cash proceeds from the sale of GIT shares amounted to RM364m as at 10 Jan 17 and Silverlake’s stake in GIT stood at 11.26%. We believe the cash proceeds are earmarked for expansion of the Merimen insurance processing business (both organically and inorganically), as well as for a special dividend in FY17F.
- We have not factored the potential special DPS into our forecasts as repatriation of proceeds from the sale of GIT shares is subject to regulatory approval.
- Silverlake stated that revenues from maintenance & enhancement services and insurance processing were recurrent and stable but project-related revenue segments were negatively affected by reduction in customers’ capex.
- It has started work on core IT system replacement contracts secured in past few months and expects initial revenue recognition in 2HFY17.
- It is responding to proposal requests and is canvassing existing and potential customers for core IT replacement and digital banking upgrade contracts.
- We cut FY17-19F core EPS by 5-31% to account for slower revenue growth in the software licensing and project services segments. As a result, our DCF-based target price falls to S$0.65 (WACC: 11.4%).
- Potential re-rating catalysts include significant order win announcements, elimination of related-party transactions and special dividends.
- A key risk is pullback in customers’ rollout schedules.