Silverlake Axis - UOB Kay Hian 2016-02-15: 1HFY16 Results In Line With Expectations; Awaiting Catalysts

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SILVERLAKE AXIS LTD 5CP.SI 

Silverlake Axis (SILV SP) 1HFY16: Results In Line With Expectations; Awaiting Catalysts 

• 1HFY16 results were in line with expectations, with net profit rising 3% yoy to RM135m. 
• Gross margin contracted 6.5ppt to 59% but this was mainly due to a different revenue mix. 
• We trim our net profit forecasts by up to 3% to reflect a higher effective tax rate. 
• Maintain HOLD with a target price of S$0.64 (previously S$0.66). Entry level is S$0.51. 

RESULTS 

• Results in line our expectations. 

• Silverlake Axis’ (SILV) 1HFY16 net profit of RM135.2m (+3% yoy) was broadly in line with our expectations, accounting for 45% of our full-year estimate. 
• Except for software licensing (-28% yoy), revenue grew across all segments - maintenance & enhancement (+32% yoy), software & hardware products (+>100% yoy), credit card processing (+36% yoy) and insurance processing (+24% yoy). 

• Lower margins on different revenue mix. 

• Gross margin declined 6.5ppt from 65.6% yoy to 59.1% yoy, given a change in revenue mix, with a higher sales of lower-margin hardware products and software project services. 
• 1HY16 administrative expenses increased 68% yoy to RM36.3m due to the consolidation of Symmetri Group (f.k.a SunGard Ambit) and professional fees for the special independent review (estimated RM2m-3m). 
• Effective tax rate of 11.1% (1HFY15: 5.6%) was higher than our estimate due to higher withholding tax on its overseas revenue and higher taxable income from subsidiaries. 

• Solid financials; second interim dividend of 0.75 S cent/share. 

• Given SILV’s solid net cash of RM222.1m (S$0.027) as of 1HFY16 and solid operating cash flow of RM108.7m, we expect a dividend payout ratio of 90% to be sustainable. 

STOCK IMPACT 

• Symmetri update. 

• We believe SILV’s near-term focus will be on consolidating the business of Symmetri rather than more M&A. 
• Potential synergies include extending SILV’s geographical reach to Eastern Europe, the Middle East and South Asia. 
• In 2QFY16, Symmetri’s margins were impacted by a higher cost structure under the transition services agreement (TSA) which contributed RM1.5m to the total transtion cost. 
• Following the expiration of the TSA in 4QFY16, we anticipate seeing a change in the cost structure and higher margin contributions from Symmetri. 

• M&E to underpin growth. 

• M&E, which makes up more than half of the group’s revenue, grew 32% yoy in 1HFY16, after the consolidation of Symmetri’s M&E revenue and on more contracts secured in Singapore and Malaysia after the completion of software implementation projects. 
• We expect segment revenue to remain resilient and to grow at a 3 year CAGR of 16.5%. In terms of pricing, M&E is expected to register a 5-7% rise in FY17. 
• Revenue growth from the licence segment is likely to be flattish as banks cut spending and focus on small project service upgrades. The group’s orderbook is estimated at RM160m. 

• Baby steps to improve transparency. 

• Management highlighted it has taken several steps to further improve transparency. These include adding more third-party systems integrators to do implementation. 
• In addition, the integration of Symmetri will also reduce the percentage of interested party transactions (IRP) as Symmetri has in-house system integrators as well as its own third-party independent system integrators. 

EARNINGS REVISION/RISK 

• Trim earnings. 

• We trim our FY16-18 net profit forecasts by up to 3% to reflect a higher effective tax rate of 11% (previously 8.5%), We now estimate the group’s 3-year EPS CAGR at 9%, which is reasonably resilient as about 55% of total earnings is recurrent maintenance income. 
• Key risks include failure to secure new contracts, execution risks and new corporate governance issues. 

VALUATION/RECOMMENDATION 

• Maintain HOLD with a sum-of-the-parts target price of S$0.64 (previously S$0.66). 

• We change our valuation methodology to sum-of-the-parts (from DCF) to reflect the listed status of its 20%-owned associate Global InfoTech on the Shenzhen Stock Exchange, which accounts for 19 % of valuation. 
• Entry price is S$0.51. 

SHARE PRICE CATALYST 

• Potential catalysts include: 
  1. more concrete plans to improve corporate governance, 
  2. reduce related party transactions, and 
  3. large contract wins.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-15

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.64 Down 0.66