Silverlake Axis - UOB Kay Hian 2016-01-26: Housekeeping Needed

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SILVERLAKE AXIS LTD 5CP.SI 

Silverlake Axis (SILV SP) - Housekeeping Needed 

• Although the recent investor presentation helped shed some light on SILV’s IPTs, we would have preferred to see some tangible plan of action or timeline on the restructuring of its complex corporate structure. 
• Maintain HOLD with a DCF-based target price of S$0.66. Entry price: S$0.53. 

WHAT’S NEW 

 Shareholder briefing that lasted four hours. 

• The group held an investor information meeting with group executive chairman, Mr Goh Peng Ooi, in attendance. 
• The objective of the meeting was to present and clarify the key aspects of an executive report by Deloitte Singapore, which was publicly released on 6 Jan 16. 
• In addition, Mr Goh explained the business model of Silverlake Axis (SILV) and its symbiotic relationship with Silverlake Private Entities (SPEs). 

STOCK IMPACT 

 Symbiotic relationship between Silverlake and SPEs. 

• In the words of Mr Goh, Silverlake is about “managing today” and the SPEs are about “managing tomorrow”. The latter is involved in the research and development (R&D) of disruptive technologies and longer term R&D cycles. As such, the SPEs are more suited for a private equity structure, which management alluded that they are looking at very closely. 
• Management re-iterated that in the event that a breakthrough is achieved in R&D by SPEs, SILV would have the first right of refusal over the discovery. 
• Management also highlighted that SILV, on its own, also conducts R&D activities, but we believe that progress would be incremental in nature. 
• Another segment that SILV is looking at is Big Data. 

 A step in the right direction…

• In our view, the appointment of Deloitte to review the related party transactions and to analyse the allegations by Razor99 is a step in the right direction to assuage concerns over prior related party transactions. 
• In addition, we also welcome the executive chairman’s direct engagement with shareholders to explain the symbiotic relationship between SILV and SPEs during the investor information meeting. This should prompt a gradual recovery in shareholders’ sentiments and confidence, amid the recent allegations by several “independent” research reports, which highlighted adverse practices by SILV. 

 …but more details on restructuring needed. 

• While we laud the group’s effort to assuage investor concerns, we think that more can be done to further shore up investor confidence. These include, in our view, a restructuring of the SPEs, especially pertaining to certain segments (such as project implementation) that are relevant to SILV being housed under the listed entity to reduce the level of interested party transactions (IPT). 

 “Natural interested party transactions” are unavoidable. 

• The group explained that natural IPTs are unavoidable due to issues such as code reuse, IP valuations and marketing. In view of this, the group will be transparent with the IPTs and will provide the necessary disclosures. 

 Different spending approaches by banks. 

• While the current uncertain macro environment could see banks rein in spending, we understand that banks are likely to shift their spending focus to a few select areas, such as enhancement in digital banking, compliance, and payment channels etc. 
• During the briefing, management noted that there has been no loss of clients since the Razor99 allegations and its team successfully implemented a key integration project in Indonesia recently. 

 Excited on SunGuard. 

• We understand that the acquisition of SunGard Asia Pacific is strategic as the company operates a complementary retail banking portfolio of software and service solutions and would help expand 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 sees significant upside from this acquisition. 

EARNINGS REVISION/RISK 

 No changes to our earnings forecasts. 

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

VALUATION/RECOMMENDATION 

 Maintain HOLD with a DCF based target price of S$0.66. 

• Given its strong cash generation, we value SILV using a DCF method. 
• We have assumed a higher market risk premium by adding 1ppt (or 20%) to factor in firm specific risks as a result of SILV’s complex corporate structure. 
• Removing the additional 1ppt to its market risk premium could result in a 17% rise to our target price to S$0.77. Entry price is S$0.53. 

SHARE PRICE CATALYST 

• In our view, potential catalysts include: 
  1. a review of SILV’s complex corporate structure to reduce related party transactions, 
  2. a pick-up in earnings growth, 
  3. new order wins, and 
  4. accretive M&As.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-26

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