Silverlake Axis - DBS Research 2021-08-27: Banking On A Gamechanger System

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Banking On A Gamechanger System

Silverlake Axis's FY21 net profit of RM143m in line, recurring revenue accounts for 81% of total revenue.
Order backlog of RM450m; outlook improving with healthy project pipeline.
MOBIUS system to be the game changer; expect more contracts ahead.
Raised Silverlake Axis's FY22-23F earnings forecast by 7% each; maintain BUY with higher target price of S$0.38.

Silverlake Axis (SGX:5CP)'s FY21 revenue of RM626.1m was 6% lower y-o-y due to lower contributions from project related revenue.
Maintenance and enhancement services revenue recorded a slight growth of 3%. The increase came from new maintenance contracts secured as well as revision of maintenance fees for existing contracts. Enhancement services revenue, which accounts 52% of the total maintenance and enhancement services revenue, continued to maintain momentum in FY21 with a 4% y-o-y increase. Software-as-a-Service (SaaS) insurance processing saw a decline of 1% y-o-y, as the prolonged pandemic and movement control restrictions have resulted in lower claims processing activities.
Recurring revenue segments comprising maintenance and enhancement services, and SaaS remained a key revenue driver, contributed 81% of total group revenue in FY21.
Silverlake Axis's 4Q21 revenue of RM176.9m also saw the first revenue growth after five quarters of consecutive negative growth.

Silverlake Axis's gross profit margin rose to 60% in FY21, from 57% in FY20, as a result of higher margins from software project, maintenance and enhancement services.
Overall, Silverlake Axis reported net profit of RM143.1m, (-23% y-o-y), in line. Core net profit would have been higher if not for the one-off administrative charge of RM24m due to fair value adjustment for the acquisition of XIT Group.

A dividend of S$0.0052 per share was declared. Dividend payout ratio reduced to only 28%, vs 41% in FY20.
Order backlog of RM450m; outlook improving with healthy project pipeline. Silverlake Axis’s current order backlog is about RM450m. This should keep the group busy for the next 1-2 years. Project pipeline remains healthy, at about RM1.45bn. Out of this, about RM325m can be expected to be closed soon. Silverlake Axis is beginning to close more deals and is seeing an increase in enquiries in its range of solutions and capabilities for the financial services market sector.
In this digital age, customers continue to make IT investment decisions despite the ongoing pandemic.

MOBIUS is a strategic Open Banking Platform that combines the customer-facing digital capabilities with core banking processing capabilities, which is Silverlake Axis’s key strength, to create a digital, unified, open end-to-end platform for commercial banking. This allows industry players to take their core banking systems across to the Möbius platform, thereby allowing them to fully integrate all their operations onto one major platform.
Silverlake Axis has signed a significant MOBIUS deal in Thailand in 4Q FY21 with a new customer. It is pursuing more deals for the new MOBIUS as well as existing systems in countries like Malaysia, Indonesia, and Thailand.
MOBIUS can be implemented in many ways. It can be used to create new products to target new markets for both new and existing customers. For existing customers, there is also a bridging function to link the current core banking system with the new MOBIUS open platform.
Hence, both systems can exist seamlessly in the initial years and the customers can gradually migrate to the new MOBIUS system in stages. The total cost of owning the MOBIUS system is lower than the traditional ones as minimal hardware is required as the system is cloud-based vs on-site for the existing ones.

Silverlake Axis is also working with three other bidders for the Malaysia digital bank licence, to provide technical support for the core banking system. With over 40% market share in the core banking system space in South East Asia, we believe Silverlake Axis stands a chance to participate in the implementation of digital banks in Malaysia, though contract values may not be big.

Given the improving outlook and potential contract wins from the new MOBIUS system and the existing core banking system, we have raised Silverlake Axis's earnings forecast by 7% each for FY22F and FY23F. MOBIUS contracts tend to have a longer tenure, hence contribution per year would be smaller.
Our target price for Silverlake Axis is raised to S$0.38 (previously S$0.33), pegged to average 4-year P/E of ~19x.
See

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-08-27

SGX Stock Analyst Report BUY MAINTAIN BUY 0.38 UP 0.360