Silverlake Axis Ltd - CGS-CIMB Research 2019-02-14: Stellar Growth, Beating Expectations


Silverlake Axis Ltd - Stellar Growth, Beating Expectations

  • Silverlake Axis’ results were above expectations, with 2QFY6/19 core net profit gaining 77% y-o-y to RM60m due to higher project-related revenue.
  • Management is optimistic on core banking contract wins, potentially from Indonesia or Thailand, by end-Dec 19, amid a rising digital banking trend.
  • Maintain ADD, with a higher Target Price of S$0.59.

Stellar 2Q19 results on better margins

  • SILVERLAKE AXIS LTD (SGX:5CP)’s 2Q19 results were above expectations, with 1HFY6/19 core net profit forming 56%/55% of our/consensus FY19F forecasts.
  • Silverlake Axis’ 2Q19 core net profit rose 77% y-o-y (+4% q-o-q) on the back of higher project-related revenue and FX gains of RM2.4m. This led to better EBITDA margins of 50% compared to 33% a year ago.
  • A one-off pre-tax gain of RM8.8m from the disposal of freehold land contributed to net profit gains for the quarter.

Benefitted from more core banking and enhancement works

  • Higher project-related revenue and more enhancement services lifted 2Q19 revenue to RM169m (+20% y-o-y, +1% q-o-q).
  • Silverlake Axis benefitted from an expanded order book and delivery of more contracts, which included larger core banking contracts in Malaysia and implementation of projects in Hong Kong and Vietnam. Order backlog was at c.RM280m as at end-Dec 18.
  • Enhancement contracts secured were mainly to support digital banking and payment transformation initiatives for two Singapore financial institutions.

Optimistic on further core banking contract wins ahead

  • Management remains optimistic on further core banking contract wins in this calendar year, which could potentially come from banks in Indonesia or Thailand.
  • Potential contract wins in the pipeline would mostly be from Silverlake Axis’ existing customers that are looking to replace or enhance their existing core banking systems to support their digital banking transformation initiatives.

Potentially higher payout in 2H19, dividend yield c.5%

  • Despite total DPS of 0.7 Scts declared thus far for the first two quarters, we understand from management that Silverlake Axis could look to pay out more dividends in 2HFY6/19 if earnings continue to remain strong.
  • We project FY19F dividend yield of c.5%, assuming the absence of special dividends as Silverlake Axis may be retaining more cash for possible acquisition opportunities ahead.

Maintain ADD with a higher Target Price of S$0.59

  • Following the stellar 2Q19 earnings, we raise our FY19-21 core EPS by 5-12%. Our sum-of-parts derived Target Price is raised to S$0.59, which implies FY20F P/E of 19x, below peers’ average of 20x. Refer to the PDF report attached for earning revisions and SOP valuation details. 
  • At 17x 12-month forward P/E and below 7-year historical mean of 21x, Silverlake Axis’ valuation remains undemanding, in our view.
  • Potential re-rating catalysts are:
    1. more core banking contract wins and
    2. acceleration in digitalisation and enhancements by Silverlake Axis’ customers.
  • Key risks include deferred IT spending by financial institutions.

Colin TAN CGS-CIMB Research | 2019-02-14
SGX Stock Analyst Report ADD MAINTAIN ADD 0.59 UP 0.560