Silverlake Axis Ltd - CGS-CIMB 2018-05-15: Holding Out For Recovery Ahead

Silverlake Axis Ltd - CGS-CIMB 2018-05-15: Holding Out For Recovery Ahead SILVERLAKE AXIS LTD SGX: 5CP

Silverlake Axis Ltd - Holding Out For Recovery Ahead

  • Silverlake Axis' 3Q18/9M18 net profit below expectations, forming 16%/52% of our full-year forecasts.
  • 9MFY6/18 EBITDA came in lower by 14% y-o-y at RM118m on the back of lower maintenance and enhancement revenue as well as FX losses.
  • Order backlog was c.RM380m, 80% of which is expected to be recognised over the next 15-18 months.
  • It anticipates additional enhancement projects, potentially worth up to c.Rm80m from the reversal of GST implementation in Malaysia.
  • Maintain ADD with a lower DCF-derived Target Price of S$0.56.

3Q18 disappointed on FX losses and lower MES revenue

  • Silverlake Axis' 3QFY18/9MFY18 net profit came in below our expectations, accounting for 16%/52% of our full-year forecasts. This was on the back of lower maintenance and enhancement services (MES) revenue which fell 16%/6% for 3Q18/9M18 due to fewer large enhancement projects delivered. MES revenue for 9MFY18 was split 50:50 between maintenance-related and enhancement projects income. 
  • 3Q18 net profit was also dragged by net FX losses of c.RM7.1m compared to net FX gains of c.RM7.3m in 3Q17.

Order backlog stood at c.RM380m

  • While its 3Q performance was lacklustre, in our view, Silverlake Axis accumulated order backlog of c.RM380m due to a slew of recent order wins. About 80% of the backlog is expected to be recognised over the next 15-18 months, which hints at higher project and licensing revenue contribution in FY19F. 
  • For the Thai contracts secured, Silverlake Axis  is still in early requirements gathering phase and c.85% of the contract amounts remain outstanding, of which management expects the bulk to be recognised from 4Q18 onwards.

Continued interest in core and digital banking upgrades

  • Silverlake Axis continues to receive enquiries and requests for proposals (RFPs) from existing and potential banking customers, with stronger demand originating from Vietnam, Thailand, Malaysia and Indonesia. 
  • Management sees pent-up demand for core banking upgrades from Indonesian banks while financial institutions in Vietnam and Thailand have allegedly been more active in their RFPs.

Removal of GST could contribute c.RM80m worth of projects

  • Recall that Silverlake Axis benefitted from the implementation of GST in Malaysia that contributed to RM73m increase or c.35% y-o-y in FY15 MES revenue. 
  • The removal of GST in Malaysia could thus lead to reversal of these GST-related software projects that are likely to see significant uptake in Silverlake Axis’ enhancement services ahead. Management thinks this could potentially contribute up to c.RM80m worth of GST-related enhancement contracts.

Maintain ADD with lower Target Price of S$0.56

  • We lower our core FY18-20F EPS by 4.3-13.6% to reflect the 3Q18 results. While growth recovery was slower than we had initially expected, we believe more significant contributions from recent order wins and the three recently acquired SPEs should kick in from FY19F onwards. 
  • Our DCF-derived Target Price is lowered to S$0.56 (WACC: 10.1%) accordingly. 
  • We maintain our ADD call with FY19F dividend yield of 6.7% contributing to the potential upside. 
  • Downside risks include delays in project executions.

Colin TAN CGS-CIMB | 2018-05-15
SGX Stock Analyst Report ADD Maintain ADD 0.56 Down 0.580