Silverlake Axis Ltd - CGS-CIMB Research 2018-08-24: A Mixed Bag But Look To Stronger FY19F Ahead

SILVERLAKE AXIS LTD SGX:5CP

Silverlake Axis Ltd - A Mixed Bag But Look To Stronger FY19F Ahead

Silverlake’s results were below expectations with 4QFY6/18 and FY6/18 core net profit accounting for 22% and 87% of our full-year forecasts, respectively.
Negative surprise in 4QFY18 came from RM12.8m impairment of goodwill for its SHGH JV in 4Q18.
We expect stronger FY19F ahead on the back of RM340m order backlog.
Maintain ADD with an unchanged Target Price of S$0.56.

Silverlake’s 4QFY18 core net profit fell 12% y-o-y to RM33.8m despite higher revenue, mainly due to a larger share of loss from its joint venture and associates. 4Q18 revenue rose 6% y-o-y to RM145.5m on higher software licensing revenue from initial delivery of high-value ontracts in Malaysia and Thailand as well as more enhancement contracts recognised during the quarter.
Silverlake’s order backlog stood at c.RM340m as at end-FY18, which management expects will largely contribute to the topline over the next two years.

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Despite FY18 revenue meeting our forecasts, Silverlake’s earnings disappointment was mainly attributed to a goodwill impairment of RM12.8m in 4Q18 for its investment in New Zealand-based Finzsoft Solutions held via SHGH JV. Finzsoft reported a loss of US$358k for the six months ending 31 Dec 2017, versus a profit of US$2m a year earlier, amid lower revenue and higher fee expenses.

Silverlake saw an uplift in software licensing revenue in 4Q18 as it started to recognise some revenue contribution from some of the Thai and Malaysian contracts secured in the last 15 months. We think more software licensing and project services contribution will follow in FY19-20F, which underpins our 11-50% EPS growth forecasts.
Silverlake continues to see strong flow of enquiries and requests for proposals from banks seeking system upgrades and enhancements, particularly in Thailand and Indonesia.

Silverlake’s revenue from maintenance and enhancement services (MES) was flat in FY18 while sales from insurance processing segment expanded 2% y-o-y.
Management guided for single-digit growth in MES segment for FY19F, and we lower our growth forecasts for insurance processing segment to reflect FY18 results. We lower our FY19-20F EPS by 14-15% as a result.

Silverlake declared a DPS of 0.8 Scts for the quarter, bringing the total FY18 DPS to 3.0 Scts. Excluding special dividends, Silverlake’s regular DPS of 1.2 Scts represented c.70% payout for FY18, lower than the payout range of above 80% in FY13-17.
As at end-Jun, Silverlake had a net cash position of RM276m.

We maintain ADD in view of stronger earnings growth in FY19-20F. Our DCF-derived Target Price is unchanged at S$0.56 (WACC: 8.9%) as we roll over our valuation to FY19-20F.
We project FY19F dividend yield of 5.2%, based on assumptions of 75% payout and some special DPS from proceeds from the sale of GIT associate.
Downside risks include delays in project executions.

Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-24

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