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

SILVERLAKE AXIS LTD (SGX:5CP)

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.

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.

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.

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.

Our FY20-22F EPS forecasts are cut by 0.3-3.2% to reflect slower earnings growth in the absence of large-sized project wins recently. While valuation appears attractive post the 30% correction over the past year, we reiterate HOLD on the back of weak earnings growth outlook in FY20F and uncertainties over dividend payout.
See Silverlake Axis Share Price; Silverlake Axis Target Price; Silverlake Axis Analyst Reports; Silverlake Axis Dividend History; Silverlake Axis Announcements; Silverlake Axis Latest News.
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 our call.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.38 DOWN 0.460