Silverlake Axis - CGS-CIMB Research 2020-11-13: Stay Optimistic Beyond The 1Q Blip

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Stay Optimistic Beyond The 1Q Blip

Silverlake Axis's 1QFY21 core net profit of RM33m (+48% q-o-q, -30% y-o-y) below expectations due to temporary disruptions arising from a cybersecurity incident.
Order win momentum improved in 1Q. Silverlake Axis is actively engaging customers to provide them with an upgrade roadmap for its next gen CBS – Mobius.
Silverlake Axis remains on track for an earnings recovery in FY21. Reiterate ADD with a slightly lower target price of S$0.38 (16.3x CY21F P/E).

Silverlake Axis (SGX:5CP)'s 1QFY21 (Jul to Sep 2020) core net profit of RM33m (+48% q-o-q, -30% y-o-y) was below expectations, coming in at 17%/18% of our/Bloomberg consensus FY21F forecasts. The key surprise was weaker-than-expected topline (-5.5% q-o-q, -9.8% y-o-y), which management attributed to temporary disruptions arising from a cybersecurity incident in Sep. See Silverlake Axis' announcements.
Margins were pressured due to
1. unfavourable revenue mix resulting in lower GPM, and
2. higher effective tax rate due to loss of pioneer status by a Malaysian subsidiary.

While large core banking deals continue to be a challenge to close due to the cautious business environment, management noted that its banking clients continue to spend on smaller incremental enhancement.
Order wins picked up in 1QFY21, with Silverlake Axis clinching c.RM80m worth of new orders (FY20: c.RM220m), and management remains confident of securing more in the coming quarters.
Silverlake Axis also notes that the level of engagement for its new cloud-based core banking system (CBS), Mobius, has picked up further. Mobius can be made available as a software-as-a-service offering, and the minimal capital outlay by banks could lower the barrier to adoption. We view customers’ upgrade roadmap to Mobius as a potential medium-term driver for Silverlake Axis, but have yet to factor this into our model.

Silverlake Axis’s orderbook stands at c.RM350m as at end-Sep. With strong order backlog and easing lockdown measures, we expect Silverlake Axis’s project-related revenue to stage a rebound in coming quarters.
Recurring revenue segments should also resume growth at high single-digits on a y-o-y basis with operations back to normal in 2Q. We remain confident that Silverlake Axis can achieve topline/core net profit growth of 5.3%/21.2% y-o-y in FY21F.

We view Silverlake Axis's weak 1Q21 results as a blip, and maintain our view that the worst is over for Silverlake Axis. We trim our FY21-23F EPS forecasts by 1.7%-3.6% to reflect lower revenue assumptions. Our target price for Silverlake Axis is lowered to S$0.38, still pegged to a 16.3x CY21F P/E (0.5 s.d. below Silverlake Axis’s 10-year historical average).
See Silverlake Axis Share Price; Silverlake Axis Target Price; Silverlake Axis Analyst Reports; Silverlake Axis Dividend History; Silverlake Axis Announcements; Silverlake Axis Latest News.
Potential catalysts include major core banking contract wins or Silverlake Axis cashing out on its stakes in Global Infotech.
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 2020-11-13

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