Silverlake Axis - RHB Invest 2018-07-27: Key Takeaways From NDR

Silverlake Axis - RHB Securities Research 2018-07-27: Key Takeaways From Ndr SILVERLAKE AXIS LTD SGX:5CP

Silverlake Axis - Key Takeaways From NDR

  • Maintain BUY and SGD0.65 Target Price with 25% upside.
  • We brought Silverlake on a full-day NDR with institutional investors, and the key takeaways are as follows.
  • Management is bullish, as it believes this is the start of banks’ capex spending cycle. It has MYR380m orderbook – 70% should be realised in FY19F under licensing and project services revenue streams. In the past, they yielded attractive gross margins of around 90% and 30%.
  • We expect revenue from both streams to surge y-o-y, and 72.7% PATMI for FY19F.

MYR380m orderbook to boost licensing and services revenue in FY19F (Jun).

  • Management guided for more than half of the existing orderbook to be realised in FY19F, mainly from two revenue streams – licensing (90% gross margins) and project services (30-40% gross margins). We understand the two revenue streams slumped significantly in FY17 and FY18F, but we expect them to surge in FY19-20.
  • Due to the rise in licensing revenue with 90% gross margins, we expect overall profitability and margins to increase as well.

Early banking spending capex cycle.

  • Banks in South-East Asia were generally cutting capex in the last few years, which resulted in Silverlake Axis’ orderbook falling as well. Management is encouraged by the latest signs shown by customers, which raised orderbook to MYR380m, after a few major contract wins.
  • It is also noted that this may be the start of banks’ capex spending cycle, which typically lasts 3-4 years with many banks in South-East Asia, especially Malaysia, Indonesia and Thailand needing to upgrade core banking systems.

Special dividends and dividends to likely continue.

  • Management guided that it would continue to reward shareholders with high PATMI payout ratio. Historically, it has always paid > 80% and this trend should continue. As a result, investors should benefit from an increased dividend yield, if profitability surges in FY19F.
  • It also still has a remaining stake in its Chinese-listed associate and may proceed with divestment plans. We view that management will highly reward shareholders with special dividends from proceeds of this divestment.

~ ~ Where SG investors share

Maintain BUY.

  • We believe there are bumper years of PATMI growth ahead – justified by Silverlake’s strong orderbook of > MYR380m (not seen since FY15- 16). As we see it, the business cycle has bottomed and earnings should surge over the next few years.
  • Positive signs from licensing and project services revenue streams in 3QFY18 also point towards a strong outlook. Our DCF-backed SGD0.65 Target Price reflects 23x FY19F P/E.
  • Key risk is the delay in or implementation of orders.
  • RHB is one of two brokers covering Silverlake.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2018-07-27
SGX Stock Analyst Report BUY Maintain BUY 0.650 Same 0.650