Silverlake Axis Ltd - CIMB Research 2015-11-13: Meeting expectations

SILVERLAKE AXIS LTD 5CP.SI

Silverlake Axis Ltd - Meeting expectations

1Q16 core earnings were in line. 1Q is also usually not a strong quarter.
Forex impact was evident in revenue growth as well as net unrealised exchange gain of RM12.9m.
0.6 Scts DPS declared (1Q15: 0.8 Scts). Absolute amount of proposed dividend increased 19% yoy due to effect of completed bonus issue.
Gross margin fell to 60% as highest-margin software licensing sales fell 41% yoy.

Deloitte’s independent review report on short-seller allegations expected soon. Could be a share price catalyst. Maintain Hold.

1Q16 core earnings were in line at 20% of our full-year forecast.
Revenue grew 13% yoy in 1Q16. The stronger US$ and S$ contributed approximately 7% of the revenue increase.
The company also recorded net unrealised foreign exchange gains of RM12.9m.
The effective tax rate increased yoy due to higher withholding tax on certain overseas revenue.

Software licensing sales fell 42% yoy while the rest of the product segments registered growth.
Given that software licensing revenue enjoys a gross profit margin in the 90% range, the group’s 1Q16 gross profit margin fell to 60% (1Q15: 65%).
Maintenance and enhancement services grew 23% yoy while insurance processing services grew 20% yoy. Both segments command gross margins in the 60% range.

Newly-acquired subsidiary SunGard Ambit clinched contracts from two Vietnamese banks. SacomBank contracted for a software upgrade and a single platform to expand its business into Laos and Cambodia while Viet Capital Bank contracted to implement a platform that provides personal financial planning tools.
Silverlake expects the contracts to have a positive contribution to FY16 results but could not reveal further details due to confidentiality constraints.

The company expects Deloitte Singapore’s independent review of the various allegations raised by the short-sell report in Aug to be completed soon. Silverlake is likely to hold a briefing after the independent review report is released.
On the customer front, the company has not lost any customers since the short-sell report was published.

The Deloitte report could be a short-term catalyst. Our numbers do not yet take in any contribution from the SunGard Ambit acquisition. More clarity on its financial contribution should be available in 2Q16 results.
The company remains optimistic on its prospects of winning a significant order from a Malaysian bank. Meanwhile, maintenance and enhancement services should continue to experience strong growth in the 20% range.
Our target price (S$0.65), based on DCF increases as we rollover to FY16.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-13

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.65 Up 0.62