Silverlake Axis Ltd - CIMB Research 2016-02-15: In line

SILVERLAKE AXIS LTD 5CP.SI

Silverlake Axis Ltd - In line

2QFY6/16 core net profit was in line with our forecast and consensus. 1HFY16 core net profit was within expectations, at 48% of our FY16 forecast.
FX impact contributed ~14% to the increase in 2QFY16 revenue yoy.
0.75 Scts DPS declared, translating into ~91.5% payout ratio.

Balance sheet in net cash position at end-2QFY16.
We cut FY16 EPS by 1% for higher costs from Symmetri but raise FY17 EPS by 8% for higher new order win assumptions.

2QFY16 core net profit was in line with our and consensus expectations. 1HFY16 core net profit was 7% below Bloomberg consensus.
Management guided that excluding FX impact and the consolidation of the Symmetri (formerly SunGard) acquisition, revenue rose 20% yoy in 2QFY16. Symmetri was marginally profitable and contributed 10% of the group’s revenue in 2QFY16.

All segments registered double-digit yoy revenue growth in both 2Q and 1H except software licensing.
The higher contribution of lower-margin software project services, as well as sales of software and hardware products in both 2Q16 and 1H16 resulted in gross margin erosion.
Silverlake registered gross margins of 58.3% in 2Q16 (2Q15: 67.8%) and 59.1% in 1H16 (1H15: 65.6%).

Banks continue to be cautious on IT spending, with preference given to shorter time frame enhancement or add-on projects. In spite of this, Silverlake targets flat-to-low single-digit revenue growth for the software licensing segment, driven by a mix of large and smaller-sized software licences in 2HFY16.
MES is still expected to show strong revenue growth, given customers’ preference for incremental cost-effective upgrades.

In 2QFY16, Silverlake’s administrative costs were higher yoy due to:
1. unrealised exchange loss of RM4.9m,
2. Performance Share Plan charge of RM2.6m, and
3. additional expenses of RM4.1m for the consolidation of Symmetri.
Most of the additional costs arising from the Transition Services Agreement (TSA) for Symmetri will stop by Mar 2016, leading to normalisation of administrative costs in 4QFY16.
Post-TSA, Symmetri could add ~RM2.0m per quarter to the group’s administrative costs.

Silverlake’s balance sheet remains net cash at end Dec-15 and a DPS of 0.75 Scts was declared for 2QFY16, representing a payout ratio of ~91.5% of 2QFY16 earnings.
The group is assessing the benefits of taking on some system integration work in-house in order to reduce the Interested Party Transactions (IPTs). It is also widening the search for qualified and reputable third-party vendors to handle some system integration work to allay concerns over the IPTs.
Reflecting changes to the stock’s beta, our DCF-derived target price falls to S$0.60.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-15

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.60 Down 0.65