Silverlake Axis - DBS Research 2019-05-15: Strong Set Of Results

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Strong Set Of Results

Strong 3Q19 and 9M19 results.
Core earnings in line; reported earnings including exceptionals above expectations.
Orderbook backlog of at least RM250m; expect more order wins.
Raise forecasts; re-iterate BUY call with S$0.63 Target Price.

We like SILVERLAKE AXIS LTD (SGX:5CP) for its market leader position in the core banking solutions space. Over 40% of the top 20 largest banks in South-East Asia that outsourced their core banking solutions run on Silverlake Axis's core banking solutions.

Silverlake Axis is also a market leader in Insurtech, in providing a collaborative and information exchange platform for the insurance industry.
Backed by a high recurring revenue base with high margins and supported by a strong balance sheet with healthy net cash level, we continue to maintain our BUY call with Target Price of S$0.63.

Orderbook backlog of at least RM250m would continue to keep Silverlake Axis busy for the next few quarters. Beyond that, we are expecting the group to win more orders. Despite the global headwinds, momentum has not slowed down. Silverlake Axis is still seeing active flow of new business enquiries and requests for proposals from existing as well as potential customers.

We have assumed lower gross margin of 58% for FY19, vs 61.9% achieved for 9M19, and 56.3% for FY18, as this is partly contract-driven.

BUY, Target Price: S$0.63. FY19F/FY20F/FY21F net earnings raised by 9%/3%/6% to account for exceptional income and slightly higher margins.
Our Target Price of S$0.63 is derived from peers’ average of 21x FY19F PE, based on Silverlake Axis’s FY Jun 20F earnings.
Silverlake Axis's dividend yield is attractive at c.4-5%. See Silverlake Axis's dividend history.

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

Silverlake Axis reported a 12% y-o- (restated) increase in group revenue to RMy154.1m in 3Q19. The growth was broad-based across all major business segments. Project related revenue of RM40.5m rose 44% y-o-y, with the progressive delivery of two Malaysian core banking projects as well as new retail automation contracts in Vietnam and Hong Kong.
Under the recurrent revenue segments, which accounted for 70% of total revenue in 3Q19, Silverlake Axis's revenue from maintenance and enhancement services climbed 8% y-o-y to RM98.9m with progressive revenue recognition for new enhancement contracts in Singapore, Malaysia and consolidation of newly acquired XIT Group’s contracts on hand.
For the insurance segment, revenue from Software-as-aService for insurance processing also grew 14% to RM8.7m million as Merimen expanded business activities into Thailand, Hong Kong and Vietnam and secured new customers in Malaysia and Indonesia.
Gross margin of 59% in 3Q19 was higher than the 58% (restated) in 3Q18 but lower than 63.9% in 2Q19. Coupled with higher other income, mainly from the reversal of value-added tax from disposal of shares in subsidiaries shares in FY17 and FY18, net profit surged 77% y-o-y to RM52.6m.
An interim DPS of 0.4 Scts was declared, bringing Silverlake Axis's 9M19 DPS to 1.1 Scts. We are expecting higher DPS in 4Q19.

Silverlake Axis's 3Q19 revenue and net profit formed 22%/25% of our forecast. On a 9-month basis, revenue and net profit jumped 23% and 82% to RM490.6m and RM178.1m respectively. Revenue accounted for 70% and net profit 84% of our forecast.
Excluding exceptionals such as tax reversal in 3Q19 and disposal gain in 2Q19, net profit still accounted for c.72% of our full-year projection.
Core earnings was in line as 3Q is typically a slower quarter. Including exceptionals, overall earnings was above expectations.

Silverlake Axis continues to progressively implement the c.RM400m projects secured in the last few quarters Orderbook backlog of at least RM250m would continue to keep the group busy for the next few quarters.
Beyond that, Silverlake Axis is currently pursuing about RM500m worth of projects, both core and digital projects. Despite the global headwinds, momentum has not slowed down.
Silverlake Axis is still seeing active flow of new business enquiries and requests for proposals from existing as well as potential customers. Silverlake Axis continues to see cross-selling opportunities especially in the digital front. 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. In terms of geographical region, more orders can be expected from Thailand, Indonesia and Vietnam.

We have raised earnings for FY19F by 9%, after including exceptionals. For FY20F and FY21F, we have assumed slightly higher gross margins. As such, we have tweaked net earnings higher by 3% and 6% respectively.
Our revised Target Price of S$0.63 (vs S$0.62 previously) is derived from peers’ average of 21x FY19F PE, and based on Silverlake Axis’s FY Jun 20F earnings.
Maintain BUY.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-05-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.63 UP 0.620