Silverlake Axis - DBS Research 2019-02-15: Riding On The Fintech Wave

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SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Riding On The Fintech Wave

• Silverlake Axis’ 2QFY19 group revenue up 20% y-o-y, key segments did well.
• Improvement in margins; net profit slightly above expectations.
• Orderbook backlog of about RM280m; expect more order wins.
• Maintain forecast; reiterate BUY call and S$0.62 Target Price.

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.

Growing project orderbook.

• Silverlake Axis continues to progressively implement the c.RM400m worth of projects secured in the last few quarters. Orderbook backlog of about RM280m would continue to keep the group busy for the next few quarters. Beyond that, we are expecting the group to win more orders, especially in regions like Thailand, Indonesia and Vietnam.
• Silverlake Axis’ share price tends to move in tandem with contract wins. We believe that there is still more upside to Silverlake Axis’ share price despite the recent spike, as we expect contract wins momentum to continue.

Strong set of 2QFY19 results.

• Key segments registered revenue growth. Margins improved while 2Q19 net profit of RM67.5m came in slightly above expectations.

High recurring revenue; high margins.

• Recurring revenue has accounted for a substantial 60% of total revenue in the last few years. Gross margins over FY10-FY18 were relatively high, coming in at about 60%. We expect this trend to maintain, supported by the growing higher-margin software licensing business.

Valuation:

• BUY, Target Price: S$0.62. Our Target Price is derived from peers’ average of 21x FY19F PE, based on Silverlake Axis’ FY Jun 20F earnings. Dividend yield is attractive at c.4-5%.

Key Risks to Our View:

• Slowdown in IT spending which could lead to lower orderbook; rate governance issues.

WHAT’S NEW - A strong set of 2QFY19 results

2QFY19 group revenue up 20% y-o-y, key segments did well.

• Silverlake Axis recorded 20% y-o-y increase in 2Q19 group revenue to RM169.0m. Growth was driven by the key software licensing, software project services and maintenance and enhancement services segments. The delivery of larger new core banking contracts in Malaysia as well as new retail automation contracts in Vietnam and Hong Kong led to the increase in revenue for the software licensing segment.
• As for software project services, the improvement was due to the progressive recognition of revenue from the delivery of two Malaysian projects and new projects that were in the process of being implemented in Hong Kong. The improvement in revenue from the recurring earnings segment i.e. maintenance and enhancement, was mainly due to new enhancement contracts secured to support the digital banking and payments transformation initiatives of two customers in Singapore.
• For 1H19, group revenue of RM336.3m (+28% y-o-y) accounted for 48% of our FY19F forecasts, in line.
• A second interim DPS of 0.4 Scts (0.3 Scts in 1Q19) was declared. We are expecting a higher DPS in 2H19.

Improvement in margins; net profit slightly above expectations.

• With increased contributions from higher margin project related revenue segments, gross profit margin improved to 64% in 2Q19 from 58% in 2Q18.
• Silverlake Axis's 2Q19 net profit of RM67.5m (+99% y-o-y, +17% q-o-q) was partly boosted by the recognition of a pre-tax gain of about RM8.8m from the disposal of freehold land.
• Overall, net profit accounted for 32% of our full year forecasts for 2Q19 and 59% for 1H19, above expectations. Excluding the disposal gain, net profit still formed 28% and 55% of our estimates, respectively.

Orderbook backlog of about RM280m; expect more order wins.

• Silverlake Axis continues to progressively implement the c.RM400m projects secured in the last few quarters Orderbook backlog of about RM280m would continue to keep the group busy for the next few quarters.
• Beyond that, we are expecting the group to win more orders, especially in regions like Thailand, Indonesia and Vietnam.
• Financial institutions need to have robust core banking systems to avoid being rendered obsolete by the rising Fintech trend. Silverlake Axis is also a beneficiary of the rising mergers and acquisitions trend of financial institutions, especially in developing countries, as this would lead to the need to revamp and align the core systems.

Maintain forecasts, re-iterate BUY call and S$0.62 Target Price.

• No change to our earnings forecasts. Our Target Price of S$0.62 is derived from peers’ average of 21x FY19F PE, and based on Silverlake Axis’s revised FY Jun 20F earnings. Maintain BUY.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-02-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.620 SAME 0.620