Silverlake Axis - RHB Invest 2017-05-17: Thailand And Vietnam Projects In 4Q17

Silverlake Axis - RHB Invest 2017-05-17: Thailand And Vietnam Projects In 4Q17 SILVERLAKE AXIS LTD 5CP.SI

Silverlake Axis - Thailand And Vietnam Projects In 4Q17

  • Silverlake Axis reported a strong 3QFY17 on face value. This was mainly on a one- off gain from the sale of shares of its China-listed associate. 
  • Its weaker software licensing and project services revenue – due to the absence of large scale projects in a tough macroeconomic climate where banks are cutting down on big scale IT spending – has led us to lower our FY17F earnings by 6.5%. This results in our DCF-backed TP being cut to SGD0.65 (from SGD0.70, 23% upside). 
  • We do expect a stronger 4QFY17 ahead, though, on new Vietnam and Thailand projects. 
  • Maintain BUY.

Overcoming the headwinds, ready for the upturn. 

  • Despite the challenging economy where banks are cutting costs and not spending on huge IT projects, Silverlake Axis (SAL) still managed to clinch small-to mid-sized projects in Thailand and Vietnam. 
  • Going forward, we may expect a slight recovery in the industry in 2018, where new contracts could potentially be secured. 
  • SAL is also constantly taking the initiative by upgrading its software offerings so as to be well positioned to take advantage of the recovery when it happens.

Proceeds from GIT shares sale. 

  • The group booked a capital gain of MYR477.7m in 9MFY17 (Jun) for the full disposal of its intended allocation-for-sale Global InfoTech Co Ltd (GIT) shares. As previously mentioned, the transfer process may last slightly longer than a year due to the USD5m/month limit. However, management said this limit may potentially increase going forward. 
  • We expect the proceeds to be utilised for acquisitions, share buybacks or special dividends that would likely be spread out over FY17-18.

Acquisitions to hasten growth in the Insurance division. 

  • SAL is likely to focus on growing its insurance processing division as it sees huge potential for expansion in this segment. 
  • We understand that the group is looking for potential acquisitions in this area to hasten the growth of this division.

Consolidating the private entities. 

  • SAL said it was exploring options and has submitted a non-binding letter indicating interest to its majority shareholder to acquire and consolidate its private entities. With regards to these private entities, no details have been announced yet. However, we feel that this move would be positive and ought to provide much transparency for investors seeking out SAL’s cost structure.

A better 4QFY17 ahead – maintain BUY. 

  • The group had previously announced small- to mid-sized contract wins in both Thailand and Vietnam. We understand that these projects would be completed in 4QFY17, with the bulk of the revenue recognition to be recognised in this coming quarter as well. As a result, we do expect software licensing and project services revenues to pick up in 4QFY17, which should provide for a stronger quarter ahead. 
  • However, SAL would still likely face a big decline in these segments YoY due to the lack of new large-sized projects. As a result, we lower our FY17F earnings by 6.5%, which results in our DCF-backed TP being cut to SGD0.65.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-17
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.65 Down 0.700