Silverlake Axis - RHB Invest 2018-11-14: Strong V-shaped Recovery; Maintain BUY


Silverlake Axis - Strong V-shaped Recovery; Maintain BUY

  • Reiterate BUY, DCF-based Target Price of SGD0.65, 59% upside with 4.6% FY19F yield.
  • Silverlake reported a stellar 1Q19, with revenue and PATMI surging 36% and 70% y-o-y to MYR166.6m and 57.9m due to the implementation of contracts it secured a few months ago.
  • The next few quarters should be stronger as the company continues to draw down from its MYR320m orderbook, with both licensing and project services revenue projected to deliver strong growth. Earnings from the acquisition of Xinfotech will also kick in in 2H19.

Stellar 1Q19 but even better quarters ahead.

  • Silverlake Axis reported a stellar 1Q19, with revenue and PATMI surging 36% and 70% y-o-y. 
  • Going forward, management aims to utilise at least MYR200m worth of orders for FY19, which will likely result in a projected 64% y-o-y PATMI surge for the same period.
  • Margins improvement should also continue, due to higher contributions from the lucrative licensing revenues.

Potential large-sized contract wins pending

  • On top of drawing down MYR55m of its orderbook in 1Q19, it secured another MYR25-30m worth of contracts on the digital banking front, which takes the orderbook value to MYR325m.
  • With banks allocating bigger budgets for IT services, we understand management is still actively in talks with a few potential new and existing customers, and is confident of securing more large-sized contracts in 1H19 – which should further contribute to PATMI growth in FY20-21F.

Acquisition of Xinfotech group.

  • Silverlake has entered into an agreement to acquire a 80% stake in Xinfotech group, a provider of software solutions for the issuance and verification of digital identity documents and financial smart cards, for an initial consideration of EUR17.6m. Of this, EUR3m will be paid in the next two financial years, subject to certain growth targets being achieved and an earn-out consideration whether it can undertake an IPO by 31 Dec 2021 and other profit growth targets.
  • There is also a put-and-call option requiring Silverlake to purchase the remaining 20% stake, subject to various conditions. This acquisition should greatly enhance and expand its digital economy offerings, particularly in public and private enterprise digital identity solutions for customer identity economics, social and financial inclusion, security, and payments applications. It will also extend geographical coverage and business operations internationally, with more than 380 enterprise customers in over 80 countries.
  • Xinfotech reported EUR1.99 in NPAT for FY17, which roughly translates to 11x FY17 P/E – ie an earnings-accretive deal for Silverlake.

V-shaped recovery affirmed.

  • With bumper years of PATMI growth ahead justified by its strong orderbook of over MYR888m (not seen since FY88-88) and potential large contracts still to come, we believe Silverlake’s v-shaped recovery outlook is intact.
  • Our DCF-backed Target Price of SGD8.88 and BUY call also is supported by its attractive 8.8% dividend FY88F yield.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-11-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.65 UP 0.570