Silverlake Axis - RHB Invest 2016-02-15: A Better 2H16 Awaits

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SILVERLAKE AXIS LTD 5CP.SI 

Silverlake Axis - A Better 2H16 Awaits 

• Silverlake reported lower-than-expected earnings, while revenue rose 44% YoY and NPAT dropped 7% YoY from a lower margin revenue mix and one-off costs from forex losses, a charge on share awards as well as transition costs from the acquisition of Sungard Ambit. 
• Going forward, it expects revenue contributions from licensing, which yields much higher margins, to pick up strongly. 
• With over MYR200m in net cash and a healthy orderbook of over MYR160m, we expect a better 2H16, with dividends paid to also catch up. 
• Maintain BUY. 

Stronger licensing contribution. 

• Silverlake Axis’ (Silverlake) licensing revenue fell 28% YoY in 1H16. However, we understand that this was due to the fact that several projects that have more focus on licensing will commence in 2H16. 
• Management remains optimistic that licensing revenue will still grow at low single digits YoY for the full year – this requires strong licensing revenue growth in 2H16. 
• With higher margin licensing revenue, profitability and gross margins are likely to grow in 2H16. 

One-off costs a drag on profitability. 

• 2Q16 profitability was largely dragged down by one-off costs such as: 
  1. consolidation costs of Symmetry Group, 
  2. a charge on share awards, 
  3. independent audit report charges from Deloitte, 
  4. transition costs from the acquisition of Sungard Ambit, as well as 
  5. forex losses. 
• Excluding these costs, a better 2H16 can be expected. 

Potential red packet – year-long moratorium expires in May. 

• Silverlake has a 20% stake in an associate that was listed in China in 2015. At current market prices, its stake is worth about SGD600m, or about half of Silverlake’s current market cap. 
• It has a year-long moratorium that expires in May, and would be able to sell its stake after the moratorium ends. If a sale of the stake does happen, we think Silverlake would most likely return the excess cash back to shareholders unless it embarks on a major acquisition. 

Steady MYR160m orderbook. 

• Excluding its Symmetry Group acquisition, it has about MYR160m worth of orders remaining as of 2Q16. 
• While the majority of banks are cutting down on big capex spending, they are still spending on maintenance and enhancement services. 
• Silverlake is also bidding for projects in Malaysia, and those involving Japanese banks that acquired assets in Indonesia which are all in short-listing phases. 
• Risks include an economic slowdown and a decline in spending by banks. 

Better profitability, more dividends. 

• With a healthy orderbook and a strong licensing contribution in 2H16, ex one-off costs, it may be set for a stronger period ahead. 
• As it has shown that it does not hesitate to use excess cash to reward shareholders, more dividends may be given then to make up for the 1H shortfall. This, with the potential red packet, leads us to maintain BUY. 
• Our TP of SGD0.75 (34% upside, 17x FY16/F P/E) is backed by a DCF valuation.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-15

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.75 Same 0.75