Initiate at BUY with a DCF-based TP of SGD1.40. At our TP, the implied FY6/15E P/E is 26.6x.

Entrenched position in growing market with solid expansion in recurring income stream.

Strong capital management potential with a net cash position of MYR300m.

Initiate at BUY with TP of SGD1.40

Our DCF-based (WACC= 9.3%, terminal g= 3.0%) TP of SGD1.40 implies a 21% upside. Despite the strong 32% share price performance YTD, we expect the solid 16% FY6/14E-17E EPS CAGR to sustain its re-rating. Furthermore, the highly cash generative nature of its business should support rising dividends.

Reasons to be optimistic

Entrenched position in the huge addressable Asia-Pacific banking market. Ranked fifth in Asia Pacific and top 2 in Southeast Asia, we expect SAL to benefit from growing IT spending by banks (five-year CAGR= 6.8%). The ongoing drive to upgrade ageing core banking systems will continue to drive sales of its flagship product and allow it to monetize the large installed base of its products.

Strong momentum in software licencing: leading indicator for recurring income. Software licencing sales increased by 15% YoY in 9MFY6/14 and we expect this to translate into growing recurring income (FY6/14E: 43% of group revenue) over the next few years.

Strong capital management potential. With an ungeared balance sheet and sizeable war chest of more than MYR300m in cash, SAL could optimize their capital structure by announcing a special dividend or initiating a share buyback program.

Catalysts: Acquisitions by existing customers, new customers. Risks: Key personnel departure, loss of customers, curb in IT spending by banks and removal of tax incentives.  

Source: Maybank Kim Eng Research - 23 Jun 2014