Silverlake Axis - DBS Research 2020-11-16: Support From Recurring Income

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Support From Recurring Income

Silverlake Axis's 1Q21 results slightly below expectations on weaker project-related segments.
Silverlake Axis secured new orders of RM70m in 1Q21, higher than last few quarters.
Cut Silverlake Axis's FY21/FY22 earnings forecast by 6% each on slower flow of large contracts.

Silverlake Axis (SGX:5CP)'s 1Q21 results slightly below expectations. 1Q21 revenue was down 10% y-o-y to RM148.2m due to lower contributions from all revenue segments except for maintenance and enhancement services. Net profit of RM32.9m was 30% lower y-o-y. 1Q21 revenue and net profit accounted for 21% and 19% of our FY21F projections respectively, still below expectations even though 1Q and 3Q are traditionally the weaker quarters.

Revenue comprising software licensing and software project services declined 35% y-o-y to RM25.2m in 1Q21.
Key projects closed were near completion, hence lower progressive revenue was recognised. The impact was mitigated by the smaller core banking implementation and retail automation contracts secured in Indonesia and Malaysia during FY2020.

The maintenance and enhancement services revenue was flat y-o-y, compared to recording high single-digit y-o-y growth over the last two years. This was partly due to the cybersecurity incident where a few of the group’s servers were attacked by a ransomware.
Silverlake Axis's revenue from Software-as-a-Service insurance processing at RM8.8m was 9% lower y-o-y mainly due to lower claims processing activities. The global lockdown due to the COVID-19 pandemic has led to significantly lower traffic volume and hence fewer motor accident claims.

Gross margin of 62% in 1Q21 was lower than 64% in 1Q20, mainly due to lower contribution from higher margin business segment such as software licensing. Nevertheless, it is still at a heathy level when compared to the average of 60.8% in the last two years.

Silverlake Axis has secured contracts to deliver innovative and transformative digital innovation enhancement solutions to 17 of its existing customers in 1Q21. The contracts are mainly signed with banks in Asean, including Indonesia, Malaysia and Thailand. These contracts are primarily for enhancements to existing core banking systems and to enhance customers’ digital experience and are expected to be completed within 12 to 18 months from the signing of the contracts.
New orders clinched 1Q21 was higher than the average of RM50m per quarter in the last few quarters.

Large ticket size projects and deals are still not in sight, deferred because of the ongoing COVID-19 pandemic, which has caused customers to rethink their priorities and switch to smaller, incremental projects instead of larger ones.
To fill the gap, Silverlake Axis is targeting smaller contracts of c.RM10m each, which include digital contracts that are generally smaller in size.

Silverlake Axis’s current order backlog is about RM345m. This should keep the group busy for the next one to two years.

We have reduced Silverlake Axis's FY21F and FY22F earnings forecast by 6% each, on the back of the slower award of large contracts. Accordingly, our Target Price is reduced to S$0.38 (prev S$0.40), pegged to its 2-year average PE level of 18x on FY21F earnings, which excludes the volatility in earnings skewed by disposal of assets.
See Silverlake Axis Share Price; Silverlake Axis Target Price; Silverlake Axis Analyst Reports; Silverlake Axis Dividend History; Silverlake Axis Announcements; Silverlake Axis Latest News.
Maintain BUY.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-11-16

SGX Stock Analyst Report BUY MAINTAIN BUY 0.38 DOWN 0.400