• Despite the 37% Silverlake Axis’s share price rally YTD, we think there is still room for upside as bank capex cycle remains on uptrend amid digitalisation drive in ASEAN.
• Possible beneficiary of a TMB-Thanachart merger which could lead to merger integration projects and enhancements for Silverlake Axis to undertake ahead.
• Maintain ADD with higher SOP-derived Target Price of S$0.62, implied 19x CY20F P/E.

Room for Further Upside

• Although Silverlake Axis’s share price has rallied 37% YTD, we think there is still potential upside from SILVERLAKE AXIS LTD (SGX:5CP)'s current price as we believe there are ample opportunities for further system integration and enhancement projects from banks in ASEAN up for grabs ahead.
• Silverlake Axis currently trades below peers’ average (21x) and 7-year historical mean of 21x, at 19x 12-mth forward P/E.
• Silverlake Axis also offers 4-5% dividend yield in FY19-20F.

Bank Capex Cycle Uptrend Lead by Malaysia, Thailand and Vietnam

• Silverlake Axis management is upbeat that tech spending by banks remain on the uptrend and growth opportunities abound in Malaysia, Thailand and Vietnam through contract wins and enhancements on core banking systems.
• In Thailand, the possible merger between TMB and Thanachart bank (Silverlake Axis’s existing customer) could create system integration projects for Silverlake Axis to undertake, possibly in FY20-21F, in our view. Silverlake Axis had previously executed the Thanachart-Siam City Bank merger integration project in FY11-12.

Potential 2H19F Earnings Surprise With 2H Seasonally Stronger

• Silverlake Axis has historically reported slightly stronger core net profit in 2H (about 50-55% over respective full-year profit) of its fiscal year compared to 1H, corresponding with higher revenue recognition (see Figure1 in attached PDF report). Thus, we think there could be some room for possible earnings surprise in FY19F, with 6MFY6/19 core net profit forming 50% of our FY19F forecast of RM238m (currently highest on the Street).

Healthy Balance Sheet With Net Cash of RM330m

• As at end-Dec 18, Silverlake Axis had a net cash of RM330m which could provide ample ammunition for possible earnings-accretive M&As to beef up its digital capabilities.
• The last acquisition made was for an 80% stake in Latvia-based X Infotech on Jan 2019 that could extend Silverlake Axis’s technological competency in electronic ID verification process and card payment solutions.

Maintain ADD, Higher Target Price of S$0.62

• We leave our FY19-21F EPS unchanged but ascribe a higher multiple of 18.4x (previously 17.6x; 10% discount to peers) to Silverlake Axis’s core business of FY20F EPS which results in a SOP-derived Target Price of S$0.62. This implies a 19x CY20F P/E that is consistent with trend line mapped against peers’ P/E and 3Y-EPS CAGR (see Figure4 in attached PDF report).
• Further major contract wins and better-than-expected results are potential re-rating catalysts.
• Deferred tech spending by banks in ASEAN remains a key risk

Source: CGS-CIMB Research - 28 Feb 2019