SILVERLAKE AXIS LTD 5CP.SIWorry not about results
- At 97% of our FY15 forecast, core net profit of RM256m (+5% yoy) was in line with our expectation but below consensus. Of its key segments, only Maintenance and Enhancement Services (MES) saw growth.
- Going forward, we believe banks are unlikely to spend aggressively on new software upgrades and will focus on selective enhancements and smaller-scale projects instead.
- Core EPS falls 12% over FY16-17F as we adjust for the bonus issue. We also introduce FY18 forecasts.
- Our DCF-based target price drops to S$0.62 (WACC 11.7%) as a result of the increased share base, weaker ringgit and higher stock beta. Upgrade to Hold. Potential re-rating catalysts include significant order win announcements and resolution/clarity on IPTs.
In line with CIMB, below consensus
- 4Q15 and FY15 results proved that we were right. Core net profit came in at 97% of our expectations but was 11% below consensus. 4Q15 results were boosted by a RM19.2m accounting gain on dilution of interest in its associate, GIT which IPOed in May 15. Of its three key revenue contributors, only MES grew (35% yoy).
- Operating cash flow remained strong and a final DPS of 1.2 Scts was declared. The company’s balance sheet remains net cash (cash:RM331m, debt:RM2.4m).
Only one engine firing
- Order backlog guidance was RM200-220m (3Q15:RM250m). The RHB contract remains a work-in-progress while the OCBC-Wing Hang Bank project seems to be on the slow burner. We do not expect many new order wins, especially in FY16 given the current cautious mood. However, the company believes 15-20% revenue growth for MES is still achievable.
Short sell report to depress price
- Following an earlier report highlighting IPTs, a much more in-depth short sell report was issued by another author last week. Again, IPTs (see overleaf) returned to haunt the company. The company has refuted all allegations and will engage Deloitte Singapore to look into the allegations on IPTs and profit margins. Until more details are forthcoming, we believe the share price is likely to stay depressed.
Where are earnings headed?
Base case.
- Our base case revenue forecast sees earnings declining for FY16 and FY17. Under this scenario, we are still holding onto new order wins for Software Licensing and Software Project Services of RM 25m each in FY16 and FY17 and RM100m in FY18. We also still assume OCBC-Wing Hang work of RM 25m each in FY16-17 for Software Licensing and a similar quantum for Software Project Services.
- Under this scenario, our DCF-derived target price is S$0.62. At S$0.62, our implied CY16 P/E is 18.2x, in line with the current peer average P/E of 18.1x. Compared to its historical average forward P/E (2007-2015) of 14.6x, our implied P/E is 25% higher than the average. We note also that -1 S.D. P/E at 8.5x equates to S$0.29 on our current CY16 estimates.
Bear case.
- We have also done some scenario analysis in which we have assumed bearishly that there will be no new order wins for Software Licensing and Software Project Services over FY16-21. Under this scenario, the DCF-derived target price falls to S$0.50.
If OPM were 35%.
- In its short sell report, the author highlighted Silverlake’s high operating profit margins versus selected peers Temenos Group and Oracle Financial Services. We are certainly no experts on either of these companies, but for illustrative purpose if we assume that Silverlake were to have an OPM of 35% (in his report, the short seller quoted Oracle Financial Services OPM at 35.5% in FY14 and 38.0% in FY15), then our DCF-derived target price on our base case scenario is S$0.40.
Concerns raised by short seller
- Of the concerns raised by the short seller, the IPTs have again returned to be the focus of discussion. In our previous report, we highlighted that more hand holding was required where the IPTs were concerned. Certainly, we view either a resolution of the IPTs once and for all or more detailed reporting of the IPTs as the medicine to calm investors’ nerves.
- The key allegations made by the short seller are:
- Complex and Deceiving Corporate Structure
- Alarming Reliance on Related Party Transaction
- Self-Dealing and Related Party Acquisition Red Flags
- Large Undisclosed Loss-Making Related Parties are Contingent Liabilities
- Undisclosed Off-Balance Sheet Debt
- Chairman’s History of Cashing Out at the Expense of Minority Shareholders
- Peer Analysis - Inexplicably High Profit Margins and Revenue per Employee
- Declining Product Competitiveness and Bribery Allegations
Company’s rebuttal
- The company issued its rebuttal yesterday evening, commenting that it views the “adverse allegations contained in the Report are clearly baseless and without merit” and will take and seek legal advice to protect and defend its interests. The company “will provide further updates in this regard, when appropriate”.
- The company also reiterated that it conducted its business in a transparent manner and in full compliance with all applicable statutory and listing requirements including its IPTs. The company stated that “Contrary to what is alleged in the Report, the Group also confirms that it has no undisclosed contingent liabilities.”.
- What is more important for shareholders is that the company will engage Deloitte Singapore to “undertake an independent review of the allegations concerning the related party transactions entered into between the Company and the Silverlake Private Entities and the associated profit margins as referred to in the Report and to provide its findings and conclusions as to their veracity, which the Company will publish in due course”.
William TNG CFA | http://research.itradecimb.com/ CIMB Securities 2015-08-26
0.62
Down
0.97
