Silverlake Axis Ltd - CGS-CIMB Research 2018-11-13: 1Q19 A Strong Start To The Fiscal Year

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SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis Ltd - 1Q19: A Strong Start To The Fiscal Year

• Silverlake's 1Q19 core net profit at RM58m (+76% y-o-y, +71% q-o-q) was above our expectations, forming 29% of our FY19F forecast.
• Order backlog stood at RM320m as at end-Sep 18.
• Maintain ADD, with major contract wins as potential catalysts.

Results above expectations

• This came on the back of higher revenue of RM167m (+36% y-o-y, +15% q-o-q), due to higher software licensing and software project services revenue, resulting from the early stages of the delivery of core banking contracts in Malaysia and Thailand.
• Revenue from maintenance and enhancement services (MES) gained 4% y-o-y to RM98m due to existing enhancement contracts secured in Malaysia.

EBITDA margin expanded to 47.5%

• 1Q19 EBITDA margin was higher at 47.5% (1Q18: 33.4%) due to higher margin licensing and higher margin achieved from the credit and cards processing segment.
• However, we expect margins to be volatile ahead in view of the lumpy nature of software licensing revenue recognition for the remaining quarters in FY19F.

Order backlog stood at RM320m as at end-Sep 18

• Further mid-and large-sized contract wins could potentially be in the pipeline as well, which could boost its order backlog.
• We anticipate further digital enhancements and upgrades on banking systems ahead, mainly from Malaysia, Thailand, and Singapore, and possibly from Indonesia.

Boosting software capabilities via earnings-accretive acquisition

• SILV has entered into a sales and purchase agreement to acquire an 80% stake in Latvia-based X Infotech (XInfo) for EUR17.6m, which implies 10x FY6/18 P/E.
• XInfo – a software solutions provider for electronic identity document and card payments – has implemented systems for governments and banks in over 45 countries globally.
• The acquisition is expected to be earnings-accretive and could lift SILV’s FY6/18 EPS by 6% to 5.4 sen on a proforma basis.

Maintain ADD

• We maintain ADD, anticipating strong core EPS growth of 50% in FY19F.
• We leave our EPS forecasts unchanged for now as earnings are tracking our full-year forecasts well, in our view. Our Target Price is based on DCF (WACC: 8.9%).
• Downside risks could come from delays in project executions.

Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-13

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