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

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. 

■ Weak RM helped sales in 2QFY16 

  • 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. 

■ Revenue growth in all segments except software licensing 

  • 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%). 

■ Outlook 

  • 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. 

■ Costs expected to normalise post-3Q 

  • 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. 

■ Maintain Hold 

  • 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