Silverlake Axis - CGS-CIMB Research 2019-11-14: Q1 FY2020 Weak Start To The Fiscal Year


Silverlake Axis - Q1 FY2020 Weak Start To The Fiscal Year

  • Silverlake Axis's Q1 FY2020 core net profit at RM47.2m (-18% q-o-q, -19% y-o-y) was below our expectations, forming 22% of our FY20F forecast. See Silverlake Axis Announcements.
  • The cautious business environment could lead to uninspiring growth in Silverlake Axis’s project-related segments as clients hold-off taking on larger projects.
  • Recurring revenue is expected to grow well in FY20F, but it is unlikely to prevent the earnings decline. Maintain HOLD with a lower Target Price of S$0.46.

1QFY6/20 results below expectations

  • SILVERLAKE AXIS (SGX:5CP) reported a Q1 FY2020 core net profit of RM47.2m (-17.7% q-o-q, -18.5% y-o-y), which made up 22%/21% of our/Bloomberg consensus full-year numbers.
  • The topline fell 1.3% y-o-y due to weakness in project-related revenue (-29% y-o-y), partially offset by stronger maintenance and enhancement services (+15% y-o-y) and insurance processing (+22% y-o-y). Meanwhile, margins were dragged down by higher administrative expenses and tax rate.
  • Silverlake Axis’s quarterly dividend remains at S$0.3sct, implying a payout ratio of c.50%. See Silverlake Axis Dividend History.

Uninspiring growth from project-related segments

  • The weaker project-related revenue (software licensing sales and project services) recorded in 1Q20 was mainly due to core banking projects from Thailand and Malaysia reaching advanced stages of completion.
  • Management noted that due to the current cautious business environment, clients are preferring to carry out incremental enhancements as opposed to the larger one-off projects. We forecast Silverlake Axis recording flattish project-related revenue in FY20F.
  • Silverlake Axis’s orderbook stood at c.RM320m as of end-Sep 19.

Stronger MES, but more needed to drive earnings growth in FY20F

  • We forecast revenue from maintenance and enhancement services (MES) seeing a stronger growth of 12% y-o-y in FY20F, helped by the completion of multiple core banking project implementations. However, given the lower margin profile of MES versus project-related services, we expect blended GPM to narrow by 1.4% pts in FY20F.
  • The expiry of pioneer status of a Malaysian subsidiary could also result in a higher effective tax rate; as a result, we are now forecasting Silverlake Axis to record a 3.4% core EPS decline in FY20F.

Maintain HOLD with a lower Target Price of S$0.46

  • Maintain HOLD, in view of the weak earnings growth outlook in FY20F. Our FY20-22F EPS forecasts are cut by 0.2-3.5% to reflect lower margin assumptions and a higher effective tax rate; our Target Price is cut to S$0.46, now based on 17.3x CY20F P/E (1.25 s.d. below its 5-year historical average). See Silverlake Axis Share Price; Silverlake Axis Target Price.
  • Upside risks include major core banking contract wins or higher dividend payout.
  • Deferred tech spending by banks in ASEAN is a key downside risk to ur call.

ONG Khang Chuen CGS-CIMB Research | 2019-11-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.46 DOWN 0.530