Silverlake Axis - DBS Research 2018-05-23: Fintech Innovation Accelerator

Silverlake Axis - DBS Vickers 2018-05-23: Fintech Innovation Accelerator SILVERLAKE AXIS LTD SGX:5CP

Silverlake Axis - Fintech Innovation Accelerator

  • Provides core banking and insurance system implementation to improve efficiency and address digital disruption challenges.
  • Turnaround in sight with growing project orderbook.
  • High recurring revenue; high margins.
  • Fair value of S$0.65 based on 22x FY19F PE.




The Business

  • Digital economy solutions provider. Silverlake Axis (SAL) is a leading provider of Digital Economy Solutions and Services to major organisations in Banking, Insurance, Payments, Retail and Logistics industries. Founded in 1989, Silverlake Axis has built a track record of successful core banking implementations, providing services to address the growing demand for transformational digital banking and insurance offerings from its customers.
  • Turnaround in sight - growing project orderbook. The RM380m contract secured recently should lead to an improvement in project-related revenues going forward.
  • High recurring revenue; high margins. Recurring revenue, mainly from software maintenance and enhancement services and insurance processing, accounts for a substantial part, about 55% of total revenue in the last few years. Gross margins over the FY10-FY17 period were at a high of 60%.


The Stock

  • Fair value of S$0.65.  Silverlake Axis currently trades at 18.8x FY19F PE, below peers’ average of 22x. Using peers’ average of 22x FY19F PE, fair value works out to S$0.65 per share, which translates into an upside of 20% from the current price.
  • Potential catalysts: Higher dividend payout; new contracts as banks gear up to face the challenges of digital disruptions.
  • Potential risks: Slowdown in IT spending which could lead to lower orderbook; concerns on corporate governance issues.


REVENUE DRIVERS


Digital economy solutions provider.

  • Silverlake Axis (SAL) is a leading provider of Digital Economy Solutions and Services to major organisations in Banking, Insurance, Payments, Retail and Logistics industries. 
  • Founded in 1989, Silverlake Axis has built a track record of successful core banking implementations, providing services to address the growing demand for transformational digital banking and insurance offerings from its customers.

Provides core banking platform to > 40% of the top 20 largest banks in SEA.

  • Silverlake Axis provides core system platform for some of the top ASEAN financial institutions. It has geographical presence in Southeast Asia, Australia, China, Europe, Japan, Middle East, New Zealand and South Asia. 
  • Over 40% of the leading Southeast Asian banks use Silverlake Axis’ enterprise financial technology solutions and services.

Leader in insurance platform.

  • Its insurance arm, mainly via wholly-owned subsidiary Merimen, builds insurance platforms for customers to improve efficiency in insurance claims and policy processing of general insurers. Silverlake Axis' primary markets are Malaysia, Singapore and Indonesia with growing markets in Thailand, Philippines and Vietnam. 
  • Merimen is Asia’s top insurance software-as-a-service (Saas) company and ranked among the global top 10 in terms of claims processing and management solutions.

High recurring revenue; high margins.

  • Recurring revenue, mainly from software maintenance and enhancement services and insurance processing, accounts for a substantial part, about 55% of total revenue in the last few years. 
  • Gross margins over the FY10- FY17 period were at a high of 60% while net margin was close to 50%, excluding disposal gains.


KEY OPERATING ASSETS


More than 10 entities under the group structure, with the bulk in Banking division

  • Silverlake Axis’ group structure is divided into four segments – Banking, Insurance, Other financial services & retail, and Investment. Silverlake Axis has > 10 entities under the three core business segments, with the bulk in the Banking division. 
  • Over the years, Silverlake Axis has been making acquisitions to beef up its services. In FY17, Silverlake Axis acquired three Silverlake Private Entities from Chairman Mr Goh Peng Ooi, and two of the entities have clinched contracts recently. 
  • In terms of investments, Silverlake Axis has invested in about five companies, two are which are publicly listed (9.24% stake in Shenzhen Stock Exchange listed Global InfoTech Co. Ltd. and 85.47% stake in New Zealand Stock Exchange listed Finzsoft Solutions Limited).


GROWTH PROSPECTS


M&A to strengthen Silverlake Axis as Fintech innovation accelerator.

  • Silverlake Axis has been on a constant lookout for acquisition targets to strengthen its role as a leading digital economy solutions company and to be a leading Fintech company.
  • Silverlake Axis has undertaken several acquisitions in recent years to broaden the suite of business enterprise software solutions and service offerings and strengthen its market position. With expanded capabilities, the group is well positioned to empower its customers to be equipped with the technology to face the challenges of digital disruptions and to compete effectively in the digital economy ecosystem.

Turnaround in sight - Growing project orderbook; maintenance and enhancement services and insurance arm to generate recurring revenues.

  • Silverlake Axis has clinched several significant contracts recently. Current order backlog of about RM380m is expected to be fulfilled in the next 15-18 months, with about 80% in FY19. Recent contract wins were mainly from Malaysia, Thailand and Hong Kong. This should lead to an improvement in project- related revenues going forward, while the maintenance and enhancement services and insurance Software-as-a-Service will continue to expand to generate a healthy increase in recurring revenues.
  • The improving market condition has led to the growing orderbook. Orderbook has improved significantly from the < RM50m secured in FY17. Financial institutions were conservative in FY16/FY17 under challenging market conditions and they continued to defer their major core IT replacements and upgrades in favour of enhancements to minimise capital outlay. Smaller projects were undertaken by financial institutions to deliver enhanced customer services or to address specific market requirements.

Strong market share; healthy project pipeline

  • The worldwide Fintech spending is expected to continue growing at a CAGR of 4.1% from 2015-2020, buoyed by continual investments in Information Technology (IT) by financial institutions and corporations to improve their competitive edge. Silverlake Axis continues to achieve steady growth in market share.
  • In Southeast Asia, Silverlake Axis has about 40% market share of banks that outsource or use external parties to build their core banking solutions.
  • Silverlake Axis is particularly strong in regions like Malaysia and Singapore. Other regions like Indonesia, Thailand, Vietnam and Hong Kong offer huge potential. The banking system for some of the bigger banks in the region, for example Indonesia, is long due for upgrading. For Malaysia, the removal of the Goods & Services Tax (GST) could provide contract worth up to about Rm80m. Silverlake Axis was awarded the contract to implement the GST system back in 2015.

Scaling up the insurance arm

  • Silverlake Axis’s insurance arm, Merimen, which has been in business for more than 10 years and was being bought over by Silverlake Axis in 2013, generates high recurring income for the group. 
  • Merimen helps to build insurance platforms for customers to improve efficiency. As a result, cost per claim drops and can also reduce fraudulence and promote transparency.
  • Furthermore, with the vast amount of data collected in the system, Merimen can also use data analytics to target more new customers. With presence in Singapore (since 2006), Malaysia (2000), Indonesia (2006), Vietnam (2016), Thailand (2015), Philippines (2016), Hong Kong (2017) and Taiwan (2018), its pay as you use Software-as-a-Service (SaaS) collaboration platform is a preferred choice for insurers in this region. 
  • Merimen has a market share of about 80-90% in Singapore and Malaysia, and about 50% in Indonesia.

Attractive yields; potentially higher dividends.

  • Dividend payout ratio has been in the region of 30% in the past few years. The high net cash of about 30% of total equity helps to support the consistent dividend payout. 
  • In FY17 Silverlake Axis paid out a special dividend of 2.3 Scts from the disposal of its investment in Global InfoTech (GIT) which is listed on ChiNet of the Shenzhen Stock Exchange. As at September 2017, Silverlake Axis has pared down its stake in GIT to 9.24% from about 20%, netting sales proceeds of approximately RM503m. In FY18, Silverlake Axis declared another special DPS of 1.3 Scts.
  • Overall, about half of the proceeds have been paid out as dividend.


MANAGEMENT & STRATEGY


Helmed by industry veterans

  • Mr Goh Peng Ooi, founder and Group Executive Chairman, founded Silverlake Group in 1989 and has built it to become a leading provider of state-of-the-art universal banking solutions, payment and retail solutions.
  • Dr Kwong Yong Sin, CEO & Group Managing Director, is an industry veteran, with over 36 years of experience in Information Technology, Business Transformation and Solution Implementation in Financial Services, Utilities and Technology Industries. Together with his management team, Silverlake Axis is now a leading provider of Digital Economy Solutions and Services to major organisations.


Addressing IPT and related issues

  • Over the past few years, Silverlake Axis has been acquiring companies from Chairman Goh’s private entities. This has led to concerns of corporate governance issues. Silverlake Axis’ share price was badly affected in 2015 after an anonymous report raised a red flag on its extensive use of interested party transactions (IPT) with Mr Goh’s private companies. 
  • From 2010-2017, Silverlake Axis had acquired several entities from Mr Goh. In 2017 alone, three entities were acquired by Silverlake Axis - Silverlake Digital Economy Sdn Bhd, Silverlake Digitale Sdn Bhd and Silverlake One Paradigm Sdn Bhd. All three were profitable, recording FY16 net profit of about RM11m, RM6m and RM2m respectively.
  • In an attempt to clear the air, Silverlake Axis has engaged auditor Deloitte & Touche to undertake an independent review of the adverse allegations raised against the group in the anonymous report. With regards to IPT, Deloitte has stated that Silverlake Axis has complied with all of the requirements of the SGX listing rules in a 55-page report dated 6 January 2016.
  • In order to remove investors’ concerns on inter-party transactions and related issues, Silverlake Axis would have to continue to acquire only good assets that can complement the group’s overall business and strategy and bring the group to greater heights.


VALUATIONS


Currently trading at below average valuations

  • Silverlake Axis currently trades at 18.8x FY19F PE, below peers’ average of 22x. 
  • Using peers’ average of 22x FY19F PE, fair value works out to S$0.65 per share, which translates into an upside of 20% from the current price.

Risk Assessment: Moderate


Look beyond FY18F results.

  • For 9-month FY18, Silverlake Axis recorded revenue of RM371.1m, a slight decrease of 2% y-o-y, and net profit of RM93.4m, down 89% y-o-y. The steep decline was mainly due to absence of disposal gains on GIT shares in FY17, and also forex loss of RM39m.
  • In terms of currency exposure, about one-third each of its revenue is in SGD, USD and RM. For 3Q18, Silverlake Axis reported a 93% drop in earnings to RM29m on 2% gain in revenue to RM126.7m.
  • Maintenance and enhancement contributed was weak due to fewer large enhancement projects secured.

Expect strong earnings growth ahead.

  • We expect net earnings to register a 70% and 10% growth in FY19F and FY20F respectively following the strong orders secured recently.
  • Going forward, more orders could be in the pipeline as customers move to equip themselves with the technology to face the challenges of digital disruptions and to compete effectively in the digital economy system.



Return *: 2
Risk: Moderate
Potential Target 12-mth* : S$ 0.65


Lee Keng LING DBS Vickers | https://www.dbsvickers.com/ 2018-05-23
SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.65 Same 0.65


* This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe.



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