UOB Kay Hian 2015-08-26: Silverlake Axis - More Needed To Address Short Sell Report; Downgrade To HOLD.


More Needed To Address Short Sell Report; Downgrade To HOLD 

  • It is rare that results matter so little. But in the case of SILV, investors are looking towards a strong rebuttal from management to address the allegations brought forward by Razor99 in a short report (dated 20 August). 
  • We think management could have done more, including a review of its complex corporate structure. 
  • Downgrade to HOLD with a DCF-based target price of S$0.66. Entry price: S$0.56. 


  • Results were broadly in line. Silverlake Axis’ (SILV) FY15 full-year net profit accounted for 97.5% of our full-year estimates, while net adjusted profit accounted for 91.2%. The group reported FY15 net profit of RM282.7m on the back of a RM19.2m gain on dilution of interest in an associate (Global InfoTech) arising from an initial IPO. 
  • The group remains in a net cash position of RM318.1m as of FY15 and has declared a fourth and final dividend of 1.2 S cents/share. This brings the total dividend declared in FY15 to 4.2 S cents/share (FY14: 4.5 S cents/share), implying a dividend yield of 6.3%. 


• Rebuttal of the allegations. 

  • On 25 Aug 15, SILV announced the following: 
    1. The short seller report, which includes the allegations of related party transactions (RPT) abuse, are clearly baseless and without merit. SILV is seeking legal advice and will provide further updates in this regard, when appropriate. 
    2. SILV re-iterates that it has always operated its business in a transparent manner and is in full compliance with all applicable statutory and listing requirements relating to its business and operations, including any RPTs entered into with the Silverlake Private Entities. All RPTs are either subject to specific prior shareholders’ approval or undertaken on the terms of previously approved shareholders’ mandates obtained in accordance with the SGX-ST listing rules. 
    3. Since listing, SILV’s accounting policies have strictly adhered to the Singapore Financial Reporting Standards up to and including the year ended 30 Jun 11 and subsequently to the International Financial Reporting Standards and has been subject to annual audits by reputable independent auditors, whose reports have been issued without any qualification. 
    4. SILV highlighted that the RPTs involving the acquisition of Silverlake Adaptive Applications & Continuous Improvement Services Ltd (SAACIS), structured services business (SSB) and the QR Group, together with the Group’s other acquisitions, have all served to synergistically broaden and deepen SILV’s available suite of software and services, resulting in significant improvements to SILV’s overall financial performance and cash flow. 
    5. SILV will be engaging Deloitte Singapore to undertake an independent review of the allegations concerning the RPTs entered into between SILV and its private entities and the associated profit margins as referred to in the report and provide its findings in due course. 

• Speed bump ahead. 

  • Revenue growth from license and project services are likely to slow down mainly due to banks and financial institutions cutting back on capex spending. Cost efficiency remains a focal point, and instead of replacing core banking systems, financial institutions are likely to stick with minor project service upgrades. However, we note that the group’s maintenance and enhancement services, which make up more than 50% of revenue, are expected to grow about 20% in FY16. In addition, we approximate that SILV’s FY16 revenue is likely grow at 10-15% while net profit is likely to grow at single to low double-digits. 

• Other updates. 

  1. SILV is still in discussions with RHB for a core banking project upgrade, with little visibility on the timeline, and 
  2. SILV is likely to be a net beneficiary of the weakening Malaysian ringgit, with majority (65%) of revenue booked in USD and SGD, while 75% of operating costs are booked in MYR. 


  • Reduce FY16 and FY17 earnings estimates by 9.8% and 15.8% respectively. We also introduce our FY18 earnings and project a 3-year net profit CAGR of 10.6% 


Downgrade to HOLD with a DCF-based target price of S$0.66. 

  • We reduced our second stage DCF growth assumptions from 7% to 3% to account for the group’s slower growing license and project service segments in the near to medium term. More importantly, we have increased market risk premium from 5% to 6% to factor in firm specific risk as a result of SILV’s complex corporate structure. 

Valuations might seem attractive. 

  • However, we think management needs to propose more measures to address investor concerns other than an independent review of the RPTs. We see a need for SILV to streamline its complex corporate structure to improve transparency and its corporate governance. 
  • Also, we think investors could benefit more from more engagement with its major shareholder to address the concerns. 


  • Recovery in investor sentiments, strong earnings growth, new order wins, accretive M&As.

Andrew Chow CFA | Bennett Lee CAIA | http://research.uobkayhian.com/ UOB KH 2015-08-25
HOLD Downgrade BUY 0.66 Down 1.38