Silverlake Axis - CGS-CIMB Research 2020-02-13: A Waiting Game


Silverlake Axis - A Waiting Game

  • Silverlake Axis's 1HFY6/20 core net profit of RM100m (-15% y-o-y) was slightly below expectations at 48% of our FY20F forecast.
  • Cautious business environment continues to hurt Silverlake Axis’s order wins, as clients hold off committing to larger projects.
  • We believe an earnings decline is inevitable in FY20F due to higher opex and tax rate. Reiterate HOLD.

2QFY20: Uninspiring set of results

  • Silverlake Axis (SGX:5CP) reported 2QFY6/20 core net profit of RM52.8m (+11.9% q-o-q, -10.9% y-o-y). 1H20 NP made up 48% of both our and Bloomberg consensus full-year numbers.
  • Topline rose 12.8% y-o-y mainly due to higher sales of software and hardware products (up 28x) and insurance processing revenue (+24% y-o-y); while revenue growth from project-related and maintenance & enhancement service (MES) segments were weaker. (Silverlake Axis Announcements)
  • 2Q20 margins were compressed due to
    1. unfavorable revenue mix resulting in lower GPM, and
    2. higher effective tax rate due to loss of pioneer status of a Malaysian subsidiary.
  • Quarterly dividend was lowered to 0.3Scts (2Q19: 0.4Scts), implying a payout ratio of c.46%. See Silverlake Axis Dividend History.

Slower project wins due to cautious business environment

  • Management noted that the business environment remains cautious, and clients are preferring to carry out incremental enhancements rather than committing to larger one-off projects. While the level of enquiries remains active, banks are hesitant to proceed with final decisions for new core banking system implementation.
  • We estimate Silverlake Axis’s orderbook stood at c.RM280m as of end-Dec 19 (end-Sep: c.S$320m), mainly made up of enhancement contracts. We forecast Silverlake Axis to record flattish project-related revenue in FY20F; while revenue from MES segment could grow 12% y-o-y.

Earnings decline inevitable in FY20F

  • However, with higher opex as Silverlake Axis expands to drive growth in non-banking segments, and higher effective tax rate kicking in this year, we believe an EPS decline (-3.4%) is inevitable in FY20F.
  • Management also indicated it would conserve cash for M&As to beef up its digital capabilities, especially in the insurance processing space. We thus lower our dividend payout ratio assumption to 50%, which implies 3.6-4.1% dividend yield for FY20- 22F.

Maintain HOLD.

ONG Khang Chuen CFA CGS-CIMB Research | 2020-02-13
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.38 DOWN 0.460