SILVERLAKE AXIS LTD
5CP.SI
Silverlake Axis (SILV SP) - The Empire Strikes Back
- Deloitte’s in-depth 55-page report strongly rebutted most of the shortseller’s report’s claims.
- Maintain BUY and SGD0.75 TP.
- Most related party acquisitions have actually paid off in profits generated/dividends paid.
- Deloitte also recommended a proper fee quotation procedure from Silverlake’s private entities and cited the lack of clarity in terms of cost allocations, in line with our earlier highlight.
- We think this report should clear up existing uncertainty and beef up investor confidence.
Most allegations strongly refuted.
- Silverlake Axis’ (Silverlake) independent Deloitte audit refuted most of the claims raised by the anonymous short-seller’s report, and provided in-depth explanation with the help and information provided by management.
- This is in line with our view that most related party acquisitions have actually paid off in terms of profits generated and dividends paid back to shareholders.
- As a shareholder since the IPO price of SGD0.31, one would have already received over SGD0.255 worth of dividends, with the company still in a healthy net cash position of over MYR200m. All this would not be possible if profits from the related party transactions were inflated.
Cost allocation clarity and procedures still needed.
- Deloitte said some information remained lacking for it to determine whether the costs charged by Silverlake-related private entities are commercially competitive in nature and recommended that additional and/or alternative procedures to be put in place.
- In addition, its comparison among industry peers like Microsoft, SAP and Oracle did suggest that, while the gross margins were in line, operating margins for Silverlake were much higher. This was due to lower R&D expenses incurred, enhancing the possibility that such expenses are incurred more by the aforementioned private entities.
Outlook positive.
- Coupled with a c.MYR200m orderbook, we maintain BUY with SGD0.75 TP (25% upside), based on 17x FY16F P/E.
- With an in-depth explanation refuting the short-seller’s allegations, we think it should provide investors with more confidence and clear up most uncertainties one would have relating to Silverlake.
- Despite a reduction in bank capex, management said that banks were still spending on maintenance and enhancement services. Thus, the company remains confident of delivering steady NPAT growth over the long term.
Jarick Seet
RHB Invest
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http://www.rhbinvest.com.sg/
2016-01-07
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