• Maintain BUY and SGD0.65 Target Price with 25% upside.
• We brought Silverlake on a full-day NDR with institutional investors, and the key takeaways are as follows.
• Management is bullish, as it believes this is the start of banks’ capex spending cycle. It has MYR380m orderbook – 70% should be realised in FY19F under licensing and project services revenue streams. In the past, they yielded attractive gross margins of around 90% and 30%.
• We expect revenue from both streams to surge y-o-y, and 72.7% PATMI for FY19F.

MYR380m Orderbook to Boost Licensing and Services Revenue in FY19F (Jun)

Management guided for more than half of the existing orderbook to be realised in FY19F, mainly from two revenue streams – licensing (90% gross margins) and project services (30-40% gross margins). We understand the two revenue streams slumped significantly in FY17 and FY18F, but we expect them to surge in FY19-20.

Due to the rise in licensing revenue with 90% gross margins, we expect overall profitability and margins to increase as well.

Early Banking Spending Capex Cycle

Banks in South-East Asia were generally cutting capex in the last few years, which resulted in Silverlake Axis’ orderbook falling as well. Management is encouraged by the latest signs shown by customers, which raised orderbook to MYR380m, after a few major contract wins.

It is also noted that this may be the start of banks’ capex spending cycle, which typically lasts 3-4 years with many banks in South-East Asia, especially Malaysia, Indonesia and Thailand needing to upgrade core banking systems.

Special Dividends and Dividends to Likely Continue

Management guided that it would continue to reward shareholders with high PATMI payout ratio. Historically, it has always paid > 80% and this trend should continue. As a result, investors should benefit from an increased dividend yield, if profitability surges in FY19F.

It also still has a remaining stake in its Chinese-listed associate and may proceed with divestment plans. We view that management will highly reward shareholders with special dividends from proceeds of this divestment.

Source: RHB Invest Research - 27 Jul 2018