Silverlake Axis - DBS Research 2021-02-11: High Recurring Income & Margins


Silverlake Axis - High Recurring Income & Margins

  • Silverlake Axis's 1H21 results slightly below expectations on lower margins.
  • Recurring revenue accounted for a high of 82%; healthy gross margin of 62.6%.
  • Tweaked FY21F/FY22F earnings down by 4% each to account for lower margins.
  • Maintain BUY with lower target price of S$0.36.

Silverlake Axis's 1H21 results slightly below expectations on lower margins

  • Silverlake Axis (SGX:5CP)'s 1H21 results slightly below on lower margins. 2Q21 revenue was down 15.8% y-o-y to RM160.5m as 2Q last year was not affected by COVID-19. Despite the drop, Silverlake Axis's 2Q21 revenue was still the highest compared to the preceding three pandemic impacted quarters.
  • Net profit of RM34.6m was down 34.5% y-o-y, mainly due to a number of one-off administrative expenses, including higher employee benefits. As a result, net margin eased to 21.6% from 27.7% in 2Q20.
  • Overall, Silverlake Axis's 1H21 revenue and net profit accounted for 48%/41% of our forecasts, slightly below expectations.

Recurring revenue accounted for a high of 82% of total revenue.

  • Project-related segment was down but recurring maintenance and enhancement revenue stayed stable. Project-related revenue was still weak due to the absence of larger contracts. The recurring maintenance and enhancement revenue was stable. In 2Q21, the recurring revenue portion accounted for 82% of total revenue.
  • Gross profit margin of 62.6% was higher than the 60.9% in 2Q20, with the implementation of cost management initiatives.

Larger projects still absent; smaller ones to fill the gap.

  • Large-ticket projects and deals are still not in sight. Customers are still hesitant to take bold steps to invest in transformational big-ticket IT projects. The prevailing approach is to retain existing technology investments and to incrementally add on or upgrade.
  • To fill the gap, Silverlake Axis is targeting smaller contracts of ~RM10m each, which include digital contracts that are generally smaller in size.

Orderbook of RM560m; 1H21 order wins higher than 1H20.

  • Silverlake Axis’s current orderbook is about RM560m. This should keep the group busy for the next 1-2 years.
  • In 2Q21, Silverlake Axis clinched RM75m worth of contracts, mainly from existing customers. These are primarily for enhancements to existing core banking system and to enhance customers’ digital experience and are expected to be completed within 12-18 months from the signing of the contracts.
  • Overall, in 1H21, Silverlake Axis closed over RM180m worth of new contracts, higher than the RM120m clinched in 1H20.

Tweaked Silverlake Axis's FY21F/FY22F earnings forecast down by 4% each to account for lower margins.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-02-11
SGX Stock Analyst Report BUY MAINTAIN BUY 0.36 DOWN 0.380