Silverlake Axis - UOB Kay Hian 2015-11-16: 1QFY16 No Major Suprises; Awaiting Findings From Deloitte Report

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SILVERLAKE AXIS LTD 5CP.SI 

Silverlake Axis (SILV SP) 1QFY16: No Major Suprises; Awaiting Findings From Deloitte Report 

• SILV’s 1QFY16 net profit was broadly in line, rising 15% yoy to RM68.6m, underpinned by its maintenance segment and forex gains. 
• However, investors’ focus will be on the findings and recommendations from an independent review by Deloitte Singapore. 
• Maintain HOLD and DCF-based target price of S$0.66. Entry price: S$0.60. 

RESULTS 

• No surprises. 

• Silverlake Axis’ (SILV) 1QFY16 net profit of RM68.6m (+15% yoy) was in line with our expectations, accounting for 23% of our full-year estimate. The group enjoyed an unrealised forex gain of RM13.5m in 1QFY16 owing to the ringgit weakness against the Singapore dollar and US dollar. 

• Healthy revenue growth. 

• 1QFY16 revenue grew a healthy 13% yoy, underpinned by a 23% yoy growth in its maintenance segment. From a low base, software project services posted growth of more than 100%. The only negative was a 42% decline in software licensing, but this segment only accounts for less than 20% of group revenue. 

• Lower margins due to different revenue mix. 

• The group's gross margin declined 4.5ppt to 60% as a result of a shift in revenue mix towards maintenance, which carries a lower gross margin (of about 60%) compared with licensing (90% gross margin). 

• Strong cash generation. 

• The group remains in a net cash position of RM383m (S$0.05/share) as at 1QFY16. More importantly, cashflow from operations remained strong, with net operating cashflow of RM60m in 1QFY16. The group spent S$23.5m in 1QFY16 on the purchase of treasury shares and reiterated that they have the capacity to continue with share buy-backs when they see value. 
• The shares purchased (18.8m treasury shares) will be either used for its employee performance share plan or cancelled. 

STOCK IMPACT 

• Awaiting findings from Deloitte Singapore. 

• Management did not provide a firm timeline for the release of the independent review by Deloitte Singapore but hopes that the report will be completed and released by end-November. 
• Other than a favourable reply, we believe the market will be looking for any recommendations by Deloitte to SILV to improve governance by streamlining its complex corporate structure. 
• Addressing some of the investors’ concerns could help to further re-rate the company. 

• Banks shifting in spending approach. 

• While the current cautious macro-environment could see banks rein in spending, we believe banks are likely to shift spending focus to selected areas such as enhancements in digital banking, compliance, payment channels and etc. 
• In addition, SILV’s insurance processing segment (Merrimen) is also seeing strong traction, with 1QFY16 revenue growth of 20% yoy. 

• Other updates. 

1.  SILV is still in discussions with RHB for a core banking project upgrade, with little visibility on the timeline. 
2.  SILV is a net beneficiary of the weakening ringgit, with a majority (70-75%) of revenue likely to be booked in US dollars and Singapore dollars, while 60% of operating costs would be booked in ringgit terms. 
3.  Its acquisition of SunGard Asia Pacific is strategic as the company operates a complementary retail banking portfolio of software and service solutions and expands the geographical coverage for SILV (>50% of SunGard’s clients are located outside of Asia). Management is confident of achieving cost efficiencies and synergies with SunGuard and foresees significant upside from this acquisition. 

EARNINGS REVISION/RISK 

• Maintaining estimates. 

• We project a 3-year net profit CAGR of 10.6% over FY15-18. Driving growth will be its maintenance division as well as enhancement projects. 

VALUATION/RECOMMENDATION 

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

• Given its strong cash generation, we value SILV using DCF. We have raised our market risk premium assumption by 20% to factor in firm specific risks arising from SILV’s complex corporate structure. Entry price is S$0.60. 
• Valuations look fair but the market will be waiting for catalysts. 

SHARE PRICE CATALYST 

• Potential catalysts include: 

1. a review of Silverlake’s complex corporate structure to reduce related party transactions, 
2. recovery in investor sentiments, 
3. a pick-up in earnings growth, 
4. new order wins, and 
5. accretive M&As.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-16

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.66 Same 0.66