Silverlake Axis - DBS Research 2019-08-26: Good Growth In Revenue And Earnings

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Good Growth In Revenue And Earnings

SILVERLAKE AXIS LTD (SGX:5CP)'s FY19 earnings above expectations; boosted by other income.
Revenue growth led by project-related business; higher GP margin of 62.6% vs 56.3% in FY18.
Orderbook backlog of close to RM300m; expect more order wins.

The strong set of FY19 results further reinforces our view that Silverlake Axis is a beneficiary of the rising Fintech wave. SAL is leveraging on its market leader position in the core banking solutions space. Silverlake Axis is also a market leader in Insurtech, providing a collaborative and information exchange platform for the insurance industry.
Backed by a high recurring revenue base of c.67% of FY19 earnings and high margins, supported by a strong balance sheet with healthy net cash level, we continue to maintain our BUY call with a lower Target Price of S$0.60.

Silverlake Axis's orderbook backlog of at least RM300m would continue to keep the group 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 60% for FY20-21F, vs 62.6% achieved in FY19, given the more cautious business environment on the back of the prolonged trade war.

Silverlake Axis's group revenue for FY19 grew 26% y-o-y to RM680.8m. Growth was broad-based across all its key business segments, led by project-related business. Only the credit and cards processing segment recorded lower revenue due to termination of an outsourcing contract.
Revenue for software licensing (+152%) and software project services (+99%) surged strongly, from the deliveries of core banking licensing contracts and new retail automation contracts. Contributions from the group’s recurrent revenue segments, maintenance and enhancement services and software-as-a-service for insurance processing business, were also higher by 8% y-o-y.

Silverlake Axis achieved a higher gross profit margin of 62.6% in FY19 versus 56.3% achieved in FY18. This was mainly due to increased contribution from higher margin software licensing segment and better margins from software project services and maintenance and enhancement services.

During the year, Silverlake Axis booked in other income of RM55.6m, mainly from accounting related adjustments such as gain of RM14.8m from fair value adjustment for past acquisitions and RM9.4m from investment related to XIT Group. Others include exceptional items like value-added-tax reversal of RM18.2m and a pre-tax gain of RM8.8m from the disposal of freehold land.
Overall, net earnings of RM245.6m (+83% y-o-y) was 6% above our forecasts, which already included the exceptional items booked in the last few quarters.

For 4Q19, Silverlake Axis's total revenue rose 30% to RM189.3m while net earnings jumped 86% to RM67.5m.
A fourth and final DPS of 0.7Scts was declared. This brings full year DPS to 1.8Scts on a 59% payout ratio, vs 1.2Scts and 1.8Scts special DPS paid in FY18. No special DPS declared for FY19 as the group prefers to conserve cash for potential acquisitions to compliment and strengthen its current operations. See Silverlake Axis's dividend history.

Silverlake Axis has secured eight core banking upgrades and enhancements contracts in 4QFY19 from existing customers totaling approximately RM40m. These include four contracts in Malaysia, including one system upgrade project from Agrobank Malaysia and three other core banking system enhancement contracts which will enable the banks to offer innovative payments and enhanced customer services.
For the other two contracts awarded in Singapore, the group will provide enhancement services to support the digital banking and payments transformation initiatives at two established financial institutions.
The next two contracts, with a large bank in Indonesia and a bank in Thailand, involve core banking system enhancements projects.

Including the new orders secured in 4QFY19, Silverlake Axis’s order backlog is now close to RM300m, which would continue to keep the group busy for the next few quarters. Beyond that, Silverlake Axis is currently pursuing about RM500m to RM600m 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.

Earnings for FY20F and FY21F were reduced by 7% to 8%, mainly on higher tax rate assumption, on the expiry of pioneer status of its Malaysian subsidiaries.
The effective tax rate for FY19 has increased to 14%, from 9% in FY18. As such, Target Price is reduced to S$0.60 (vs S$0.63 previously), pegged to peers’ average of 21x, and based on Silverlake Axis’s FY Jun 20F earnings. Maintain BUY.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-08-26

SGX Stock Analyst Report BUY MAINTAIN BUY 0.60 DOWN 0.630