Silverlake Axis - DBS Research 2020-05-15: Attractive Valuations

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Attractive Valuations

Silverlake Axis's 3Q20 net profit below expectations on weaker margins.
No material disruptions from COVID-19; secured RM65m new contracts in 3Q20.
Cut FY20F/21F earnings by 18%/19% on lower gross margin assumptions.
Maintain BUY with lower Target Price of S$0.38; current valuations attractive at -1SD level.

We cut FY20-21F earnings for Silverlake Axis (SGX:5CP) by 18-19% on lower gross margin assumptions, as we expect the smaller contract wins to have lower licensing revenue and thereby narrower margins.
We continue to like Silverlake Axis for its high recurring revenue proportion that forms at least 60% of total revenue, with attractive yield of about 4-5%, on a 60% payout ratio.
At the current level, Silverlake Axis is trading at attractive PE of 13.5x for FY20F and 11.8x for FY21F, near its -1SD level of its average 4-year forward PE.

Silverlake Axis reported group revenue of RM151.7m in 3Q20, 2% lower y-o-y, mainly due to lower contribution from project-related segments. The completion of a Thailand-based core banking transformation project in 4Q19, as well as lower progressive revenue recognised from a few major contracts secured in Malaysia and Thailand which are nearing completion, led to the overall decrease in project-related revenue.
The decrease was partially offset by revenue contribution from the delivery of new core banking implementation contracts secured in Indonesia and Vietnam in 1H20, as well as a technology refresh contract secured in Malaysia in late FY19. The sale of software and hardware products, which is cyclical, was also lower at RM1.2m.
For the 9-month period, group revenue recorded a 3% growth to RM506.8m, accounting for 72% of our forecasts.

Recurring revenue segments of maintenance, enhancement services and software-as-a-service recorded a y-o-y growth of 12% to RM120.7m in 3Q20, accounting for 80% of total revenue, and 74% for 9-month FY20.

The decrease in gross profit margin to 54.8% in 3Q20, vs 59.0% in 3Q19, was mainly due to a change in revenue mix, in particular, lower software licensing revenue.
Nine-month FY20 gross margin was 60%, compared to 62% in 9-month FY19.

A lower other income of RM8.7m was recorded for 9-month FY20. In FY19, Silverlake Axis reported other income of RM31.7m, which was attributable to the reversal of value-added tax and some disposal gains.
The increase in income tax expense was mainly due to the expiry of pioneer status of a Malaysian subsidiary effective 1Q20, higher taxable income from certain subsidiaries, as well as higher withholding tax on overseas revenue.
Operating expenses were also 16% higher due to the consolidation of XIT Group that was acquired last year, and also increase in finance costs from the unwinding of discount on contingent consideration payable for acquisitions and infrastructure investment.
Overall, 9-month net profit of RM125.6m (-29% y-o-y) accounted for 68% of our FY20 forecasts, below expectations. The 3Q20 net profit of RM25.6m was down 51% y-o-y.

There were no material disruptions to the Group’s operations in 9-month FY20 and the Group continued to deliver on existing contracts as well as secured a number of new contracts.
A total of RM65m of new contracts was closed in 3Q20. We continue to expect Silverlake Axis to secure smaller projects in 4Q20 in the range of RM50-70m. Large deals, however, continue to be a challenge to close, with many being delayed by the movement restriction measures or economic uncertainties. Orderbook backlog remains at close to RM300m.

We have cut FY20F/21F earnings by 18%/19% mainly on a lower gross margin assumption of 56% (vs 62% previously) as we expect the smaller contracts to have lower licensing revenue, and thereby narrower margins. The impact from the lower gross margins is partly offset by the group’s restructuring programmes to rationalise costs and to improve efficiencies from operations.

At the current level, Silverlake Axis is trading at an attractive PE of 13.5x for FY20F and 11.8x for FY21F, near its -1SD level of its average 4-year forward PE. Target Price is adjusted to S$0.38 (previously S$0.48), which is pegged to its average PE level of 20x.
See Silverlake Axis Share Price; Silverlake Axis Target Price; Silverlake Axis Analyst Reports; Silverlake Axis Dividend History; Silverlake Axis Announcements; Silverlake Axis Latest News.
We maintain a dividend payout ratio of 60% (similar to 59% in FY19), which works out to a DPS of 1.1 Scts (1.77 Scts in FY19) or yield of 4.5%.
Silverlake Axis prefers to conserve cash, especially during the current uncertainties due to COVID-19.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-05-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.38 DOWN 0.480