Silverlake Axis - DBS Research 2019-01-07: Fintech Accelerator


Silverlake Axis - Fintech Accelerator

  • Silverlake Axis secured eight digital innovation contracts from financial institutions and one from retailer AEON. 
  • Small contract size but signify a new growing revenue stream for the group. 
  • Digital innovation contracts less cyclical and lumpy compared to core banking contracts. 
  • Tweaked earnings up by 4%; maintain BUY with slightly higher Target Price of S$0.62. 

Leveraging on market leader position to ride on the Fintech wave.

  • Over 40% of the top 20 largest banks in South-East Asia that outsourced their core banking solutions run on SILVERLAKE AXIS LTD (SGX:5CP)’s core banking solutions. It is also a market leader in Insurtech, in providing a collaborative and information exchange platform for the insurance industry.
  • Riding on the Fintech wave, Silverlake Axis can leverage on its market leader position to secure more contracts as financial institutions upgrade/enhance their systems to avoid being rendered obsolete by the rising Fintech trend.

Turnaround in sight – growing project orderbook.

  • Orderbook has improved significantly from the < RM50m secured in FY17 to slightly more than RM400m currently, with potential for more orders. In the past, the peak level of contract wins could reach RM500m to RM600m per year.
  • An upcycle typically last for about four to six years while a downcycle is about two years. We are at the beginning of an upcycle now, based on the contracts secured.

High recurring revenue; high margins.

  • Recurring revenue, mainly from software maintenance and enhancement services and insurance processing, accounts for a substantial part, close to 60% of total revenue in the last few years. Gross margins over the FY10-FY18 period were relatively high, coming in at about 60%.
  • We expect this trend to continue, supported by the growing higher-margin software licensing business.

Key Risks to Our View:

  • Slowdown in IT spending which could lead to lower orderbook; concerns on corporate governance issues.

WHAT’S NEW - Secures digital innovation contracts; new revenue stream for the group

Secured eight digital innovation contracts from financial institutions and one from retailer AEON.

  • Silverlake Axis has secured eight contracts during the first 6 months of FY2019 (July 18 to Dec 18) to deliver innovative and transformative digital economy solutions to existing customers of the group.
  • Five contracts were from Malaysia. These include the delivery of innovative payment solutions at three major financial services groups to enable them to attract and grow their digital business ecosystem for the future, and also the deployment of channel innovations at two other financial services providers to enhance their customers’ digital experience.
  • The remaining three contracts were from Singapore and Thailand. Silverlake will provide services to support the digital banking and payments transformation initiatives at three established financial institutions.
  • The software and services retail contract was signed with AEON Vietnam. Silverlake’s system, PROFIT, is already being used in AEON stores located in Cambodia, China, Hong Kong, Malaysia and Indonesia. PROFIT offers end to end solutions to the retail industry enabling retailers to deliver enhanced customer services and fulfill demand and supply chain operational efficiencies.
  • The group’s software solutions and services deployed for these contracts are from its wholly-owned subsidiaries, namely Cyber Village, Silverlake Digitale (SDS), Silverlake One Paradigm (SOP) and Silverlakegroup Pte Ltd. Both SDS and SOP were acquired in 2017 from Chairman Mr Goh’s Group of Companies to beef up the group’s digital capabilities.

Contract size small but signify a new growing revenue stream for the Group.

  • No further details of the contracts were disclosed but we estimate that digital innovation contracts are generally much smaller than core banking contracts, at about < RM10m per contract, and takes less than a year to complete.

Digital innovation contracts less cyclical and lumpy, as compared to core banking contracts.

  • With these new contracts, orderbook is now slightly more than RM400m.

Tweaked earnings up by 4%; Target Price: S$0.62.

  • Our Target Price, derived from peers’ average of 21x FY19F PE, and based on Silverlake Axis’s revised FY Jun 20F earnings, is now S$0.62 (Prev S$0.60) which translates to a potential upside of 45% from the current price.
  • Dividend yield is attractive at c.5%.

Lee Keng LING DBS Group Research | 2019-01-07
SGX Stock Analyst Report BUY MAINTAIN BUY 0.62 UP 0.600