Silverlake Axis - DBS Research 2020-02-14: Healthy Margins Despite Higher Tax


Silverlake Axis - Healthy Margins Despite Higher Tax

  • We cut FY20-21F earnings for Silverlake Axis (SGX:5CP) by 8-13% on higher tax rate assumption and lower project related revenue. Even though tax rate ahead is expected to be high at c.29%, net margin is still in excess of 20%.
  • We continue to like Silverlake Axis for its high recurring revenue proportion that forms at least 60% of total revenue, and high gross margins of c.60% with attractive yield of c.4%, on a 60% payout ratio.
  • Maintain BUY with lower S$0.48 Target Price.

2QFY20 results in line; higher tax rate to be the norm

  • Silverlake Axis reported 2QFY20 revenue of RM190.7m (+13% y-o-y, +16% q-o-q). Net profit of RM52.8m was down 22% y-o-y (+12% q-o-q) due to higher tax rate of 31% vs 17% in 1Q20 and 14% for FY19.
  • 2QFY20 revenue and net profit accounted for 26% and 25% of our forecast respectively, and 49%/50% for 1HFY20, in line. DPS of 0.3Scts was declared in 2QFY20, slightly lower than the 0.4Scts in 2QFY19.

Higher tax rate to be the norm.

  • Going forward, tax rate is expected to be in the high 20+%, due to the expiry of pioneer status of a Malaysian subsidiary effective 1QFY20, higher taxable income from certain subsidiaries as well as higher withholding tax on overseas revenue.

Growth from recurring income segments.

  • Recurring revenue segments of maintenance, enhancement services and Software-as-a-Service (Insurtech) rose 5% to RM133.8m, and accounted for 70% of group revenue in 2QFY20.
  • Insurance processing activities benefited from a new pricing structure introduced in key markets as well as additional revenue contribution from new productivity and analytics solutions.

Weaker revenue from project related divisions.

  • Software licensing recorded higher revenue with contribution from new banking contracts whereas software project services recognised lower progressive revenue from ongoing implementation contracts secured in Malaysia and Hong Kong.
  • Sales of software and hardware products was strong, benefitting from new contracts secured, while credit and cards processing was weak following the termination of an outsourcing contract.

Lower gross margins due to product mix.

  • Gross profit margin declined to 61% from 64% in 1QFY20 due to a change in revenue mix with a higher proportion of revenue recorded from lower margin segment such as the sale of software and hardware products.

Larger projects on hold, to be replaced by smaller ones.

  • The deal pipeline remains healthy as Asian financial institutions and corporations continue to invest in Information Technology (IT) to improve their competitive edge. However, despite a healthy pipeline of c. RM1.5bn, the award of larger contracts in excess of RM100m has been slow. To close the gap, Silverlake Axis is targeting smaller contracts of c.RM10m each and these include digital contracts which are generally smaller in size.
  • There is an increasing spend on incremental enhancements as opposed to the larger one-off projects.
  • Silverlake Axis announced that it has secured two contracts to deliver innovative and transformative digital economy solutions and two license renewals and maintenance support contracts to two of its existing customers for 1HFY20. With these contracts, orderbook backlog is close to RM300m.

Cut FY20-21F earnings by 8-13%; maintain BUY with lower Target Price of S$0.48.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-02-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.48 DOWN 0.570