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

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. 

■ Benefited from weak RM 

  • 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 declined 

  • 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. 

■ Announces new order wins 

  • 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. 

■ Deloitte report expected soon 

  • 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. 

■ Maintain Hold 

  • 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 | 2015-11-13
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.65 Up 0.62