Investment Merits

• Capitalising on regional demand for core banking transformations, with about  RM300  million  project  backlog  and  poised  to  win  further contracts
• Future  recurring  revenue  stream  generated  with  each  successful implementation of its licensed software system.
• Superior net margin at 49.2% above peers' average at 17%
• Solid  cash-generating  business  model  with  net  cash  of  RM373  mil, offering attractive 4% dividend yield
• Expansion  of  software  offerings  beyond  core  banking  to  meet  the increasing demand for the digital economy business globally

Industry Trends

With  Basel  III  regulations  and  increasing  customer  sophistication,  we  foresee banks  in  ASEAN  would  need  to  innovate  for  continued  growth  through  core banking transformation. Key reasons for effecting major changes to core banking systems include:

• Expansion and consolidation of banks in the region
• Technology trends in Internet and mobile banking
• "Big Data" analytics to drive further IT investments
• Many top banking players in Asia/Pacific still on legacy systems
• Rapid growth in Islamic banking and finance

SWOT Analysis

Strengths

• Excellent 100% track record in successful system implementations
• Key ASEAN market with wide customer network
• Solid free cash generation, balance sheet with high cash balance, minimal debt ratio
• Deriving synergies from recent acquisitions Weakness
• FX exposure may pose material impact to profit

Opportunities

• Expanding foothold in ASEAN market as banks expand regionally
• Growth opportunities in China, Hong Kong, Japan and MENA regions
• Expansion  into  insurance, payment,  retail  and  logistics business  with  its enterprise solutions

Threats

• Slowdown in IT investments, expansion activities by banks
• Strong competition from other prominent core banking vendor

Investment Action

Based on the investment merits above, we initiate coverage of Silverlake Axis with an  Accumulate  recommendation,  deriving  a  target  price  of  S$1.02  using  DCF valuation.  This  gives  an  implied  FY14F  P/E  multiple  of  22.6X.  While  the  multiple may be high, we note the excellent growth potential for Silverlake Axis expanding its footprints in Asia.

Source: Phillip Securities Research - 16 Jan 2014