SILVERLAKE AXIS LTD (SGX:5CP)
Silverlake Axis - Fintech Accelerator
- Leveraging on market leader position to ride on the Fintech wave.
- Turnaround in sight, with growing project orderbook.
- High recurring revenue; high margins.
- Re-initiate with BUY and Target Price of S$0.60.
Company Background
Digital economy solutions provider.
- SILVERLAKE AXIS LTD (SGX:5CP) is a leading provider of Digital Economy Solutions and Services to major organisations in Banking, Insurance, Payments, Retail and Logistics industries.
- Founded in 1989 and listed on the Singapore Stock Exchange in 2003, Silverlake Axis has built a track record of successful core banking implementations, providing services to over 300 customers to address the growing demand for transformational digital banking and insurance offerings from its customers.
Four key segments.
- Silverlake Axis’ group structure is divided into four segments – Banking, Insurance, Other Financial Services & Retail, and Investment. Silverlake Axis has more than 10 entities under the three core business segments, with the bulk in the Banking division.
- Banking: The core system platform is used by the top three of the five largest ASEAN financial institutions – CIMB Bank, OVERSEA-CHINESE BANKING CORP (SGX:O39) and UNITED OVERSEAS BANK LTD (SGX:U11). Over 40% of the top 20 largest banks in South-East Asia that outsourced their core banking solutions use Silverlake Axis’ enterprise financial technology solutions and services. Silverlake Axis has presence in South East Asia, Australia, China, Europe, Japan, the Middle East, New Zealand and South Asia, for the Banking segment.
- Insurance: For the Insurance division, its primary markets are Malaysia, Singapore and Indonesia, with growing markets in Thailand, the Philippines, Vietnam and Hong Kong. Over 125 insurers, 5,000 automobile, 25 major automobile brands and 2,000 insurance intermediaries use Silverlake Axis’ insurance platform, Merimen. In Malaysia and Singapore, all insurers use Merimen. Merimen is now an Insurtech market leader in providing collaborative and information exchange platform for the insurance industry. It helps to improve operational efficiency and also to identify suspicious cases, thus reducing invalid claims paid.
- Other Financial Services & Retail: Silverlake Axis also has over 20 years of experience with proven track record in retail enterprise solutions. It has ventured into cloud-based digital platform to help its retail customers to drive their retail innovation and to provide greater control and flexibility. Some of its key customers include Robinsons, Marks & Spencer, Metro (METRO HOLDINGS LIMITED (SGX:M01)) and Aeon.
- Investment: In terms of investments, Silverlake Axis has invested in about five companies, two are which are publicly listed – Global InfoTech and Finzsoft Solutions. Silverlake Axis has since reduced its shareholding in Global InfoTech Co. Ltd. (GIT) from 20.01% in 2016 to 8.30% currently, recording gains of RM703m. Any subsequent disposal of GIT shares would depend on market conditions. From the sale of GIT shares in FY17 and FY18, Silverlake Axis has paid five special dividends, totalling 4.1 Scts per share or the approximate equivalent of RM330m, which is about 62% of the total cash inflow from the GIT shares sale. Other uses of the share sale proceeds are share buybacks and acquisitions.
- Refer to the attached PDF report for details on Silverlake Axis' business model and management team.
Competitive Strengths
Leader in digital economy solutions provider, with > 40% of the top 20 largest banks in SEA.
- Silverlake Axis is a leading provider of Digital Economy Solutions and Services to major organisations in the Banking, Insurance, Payments, Retail and Logistics industries. Silverlake Axis provides core system platform for some of the top ASEAN financial institutions. It has geographical presence in Southeast Asia, Australia, China, Europe, Japan, the Middle East, New Zealand and South Asia, with over 300 customers.
- Over 40% of the leading Southeast Asian banks that outsourced their core banking solutions use Silverlake Axis’ enterprise financial technology solutions and services.
Leader in insurance platform.
- Its insurance arm, mainly via wholly-owned subsidiary Merimen, builds insurance platforms for customers to improve efficiency in insurance claims and policy processing of general insurers. Silverlake Axis’ primary markets are Malaysia, Singapore and Indonesia with growing markets in Thailand, the Philippines and Vietnam.
- Merimen is Asia’s top insurance software-as-a-service (SaaS) company and ranked among the global top 10 in terms of claims processing and management solutions.
Leveraging on market leader position to ride on the Fintech wave.
- Financial institutions are going through enhancements. They need to beef up their systems to avoid being phased out by the rising Fintech trend. The use of Artificial Intelligence (AI) has become the norm. AI automates tasks like data analysis, thus helping to save a significant amount of time. The technology is also used to create robo-advisors and also to help to detect fraud by monitoring patterns of customer behaviour. Blockchain disrupts the current bank system by being a real-time updating digital ledger that cannot be changed. This takes paper and fraud out of the equation.
- The rising popularity of mobile banking has also resulted in a growing number of digital banking transactions. With the digital age, the financial services industry has become vulnerable to cyberattacks. Thus, security has become a top priority. Financial institutions would need to have a robust system to gain customers’ trust and ease of mind to perform transactions online. Against this backdrop, and leveraging on its leadership position, especially in ASEAN, in both the core banking system and Insurtech segment, Silverlake Axis is able to enable more financial institutions to ride on the Fintech trend in order to become more competitive.
Rising financial institutions’ capex.
- Financial institutions were conservative in FY16/FY17 amid tough market conditions, and they continued to defer major core IT replacements and upgrades in favour of enhancements to minimise capital outlay. They pursued smaller projects to deliver better customer services or to address specific market needs. This trend is set to reverse, as they beef up their systems to ride on the Fintech wave.
- Technology spending by Asian financial institutions and corporations has shown an improvement in FY18 with increased targeted expenditure on scalable and transformative technologies. Specifically, innovative enterprises continued to invest in big data and analytic tools while accelerating the adoption of software-as-a-service (SaaS) and cloud-based digital platform. In addition, changing regulatory environment and business landscape have also bolstered the need for IT enhancement as financial institutions and corporations strive to keep pace with regulatory compliance and remain competitive in an inreasingly demanding market place.
Turnaround in sight; growing project orderbook.
- The improving market condition has led to a growing orderbook. Its orderbook has surged from the < RM50m secured in FY17. Silverlake Axis has clinched several significant contracts recently, including three core banking system replacement projects in Thailand, and also from Malaysia and Hong Kong, which have progressively contributed to FY18 revenue.
- Its current order backlog of about RM380m is expected to be fulfilled in the next 15-18 months, with the bulk of it in FY19. This should lead to an improvement in project-related revenues going forward, while the maintenance and enhancement services and insurance software-as-a-service will continue to expand to generate a healthy increase in recurring revenues.
High recurring revenue; high margins.
- Recurring revenue, mainly from software maintenance an enhancement services and insurance processing, accounts for a substantial part, close to 60% of total revenue over the FY10-FY18 period.
- Gross margins were at a high of 60% during the period, supported by the relatively stable margins for the maintenance and enhancement services segment.
Attractive yields; potentially higher dividends.
- Silverlake Axis’ dividend payout ratio has been at least 40% in the past few years. The high net cash of about 30% of total equity helps to support the consistent dividend payout.
- In FY17 Silverlake Axis paid out a special dividend of 2.3 Scts from the disposal of its investment in Global InfoTech (GIT) which is listed on the ChiNet of the Shenzhen Stock Exchange. Silverlake Axis has since pared down its stake in GIT to 8.30% from about 20%, recording gains of RM703m. In FY18, Silverlake Axis declared another special DPS of 1.8 Scts.
- Overall, about half of the proceeds have been paid out as dividend. Silverlake Axis could potential pay higher dividend when the remaining stake in GIT is sold.
- Refer to the attached PDF report for complete analysis on Silverlake Axis' growth strategies and key risks.
Valuation
Re-initiate with BUY, Target Price: S$0.60.
- We re-initiate coverage on Silverlake Axis with a BUY recommendation and Target Price of S$0.60. Our Target Price is derived from peers’ average of 21x FY19F PE, based on Silverlake Axis’ FY Jun 20F earnings, which translates to a potential upside of 45% from the current price.
Four new contracts secured.
- Since January 2017, Silverlake Axis has secured four contracts worth a total of RM380m – three core banking contracts from Thailand, Malaysia and ASEAN, and one digital transformation contract for credit cards in Hong Kong. Further mid-to large-sized contracts could be in the pipeline, mainly from Malaysia, Thailand, Indonesia and Singapore. These contracts include digital enhancement and new core banking contracts.
- In the past, the peak of contract wins could reach RM500m to RM600m per year.
Expect more contacts to be awarded.
- In FY June 19, the bulk of the RM380m contract that Silverlake Axis has secured would have been booked in. The group is also currently in the midst of negotiating for more new contracts. Thus, we expect new contract wins to be trending up, as represented by the blue bar shown in the chart below.
- Going forward, more orders could be in the pipeline as customers move to equip themselves with the technology to face the challenges of digital disruptions and to compete effectively in the digital economy ecosystem.
Share price to move in tandem with contract wins
- In the chart as shown in the PDF report attached, the new contracts secured and booked for the fiscal year are represented by the red bar. These contracts are non-recurring in nature. Generally, the share price tends to move about one year ahead of the new contracts booked as at each fiscal year end. Thus, the two arrows (as represented by each colour pair) moved in the same direction but with about one-year time lag, with the share price as the leading indicator. However, in recent years, the new contracts booked for each year has started to rebound in FY June 18 but nevertheless the share price is still trending down.
- Overall, judging by the historical trend, Silverlake Axis share price should expected rise in contract wins.
Lee Keng LING
DBS Group Research
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https://www.dbsvickers.com/
2019-01-03
SGX Stock
Analyst Report
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