Silverlake Axis - A Waiting Game

Date: 13/02/2020

Source  :  CIMB
Stock  :  Silverlake Axis       Price Target  :  0.38      |      Price Call  :  HOLD
        Last Price  :  0.23      |      Upside/Downside  :  +0.15 (65.22%)

  • Silverlake Axis's 1HFY6/20 core net profit of RM100m (-15% y-o-y) was slightly below expectations at 48% of our FY20F forecast.
  • Cautious business environment continues to hurt Silverlake Axis’s order wins, as clients hold off committing to larger projects.
  • We believe an earnings decline is inevitable in FY20F due to higher opex and tax rate. Reiterate HOLD. Target Price SGD0.38

2QFY20: Uninspiring Set of Results

  • Silverlake Axis (SGX:5CP) reported 2QFY6/20 core net profit of RM52.8m (+11.9% q-o-q, -10.9% y-o-y). 1H20 NP made up 48% of both our and Bloomberg consensus full-year numbers.
  • Topline rose 12.8% y-o-y mainly due to higher sales of software and hardware products (up 28x) and insurance processing revenue (+24% y-o-y); while revenue growth from project-related and maintenance & enhancement service (MES) segments were weaker. (Silverlake Axis Announcements)
  • 2Q20 margins were compressed due to
    1. unfavorable revenue mix resulting in lower GPM, and
    2. higher effective tax rate due to loss of pioneer status of a Malaysian subsidiary.
  • Quarterly dividend was lowered to 0.3Scts (2Q19: 0.4Scts), implying a payout ratio of 46%.

Slower Project Wins Due to Cautious Business Environment

  • Management noted that the business environment remains cautious, and clients are preferring to carry out incremental enhancements rather than committing to larger one-off projects. While the level of enquiries remains active, banks are hesitant to proceed with final decisions for new core banking system implementation.
  • We estimate Silverlake Axis’s orderbook stood at RM280m as of end-Dec 19 (end-Sep: S$320m), mainly made up of enhancement contracts. We forecast Silverlake Axis to record flattish project-related revenue in FY20F; while revenue from MES segment could grow 12% y-o-y.

Earnings Decline Inevitable in FY20F

  • However, with higher opex as Silverlake Axis expands to drive growth in non-banking segments, and higher effective tax rate kicking in this year, we believe an EPS decline (-3.4%) is inevitable in FY20F.
  • Management also indicated it would conserve cash for M&As to beef up its digital capabilities, especially in the insurance processing space. We thus lower our dividend payout ratio assumption to 50%, which implies 3.6-4.1% dividend yield for FY20- 22F.

Maintain HOLD

  • Our FY20-22F EPS forecasts are cut by 0.3-3.2% to reflect slower earnings growth in the absence of large-sized project wins recently. While valuation appears attractive post the 30% correction over the past year, we reiterate HOLD on the back of weak earnings growth outlook in FY20F and uncertainties over dividend payout.
  • Upside risks include major core banking contract wins or higher dividend payout.
  • Deferred tech spending by banks in ASEAN is a key downside risk to our call.

Source: CGS-CIMB Research - 13 Feb 2020

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