• Silverlake Axis's 1QFY20 net profit fell short of expectations, revenue in line.
• Improvement in gross profit margin offset by higher expenses and tax rate.
• Orderbook backlog of RM300m; order win momentum remains strong.
• Trimmed earnings by 5%; maintain BUY with lower S$0.57 Target Price.

Steady 1QFY20 Revenue With Good Growth From Recurring Segments

• Recurring revenue registered 15% growth and accounted for 74% of total revenue, up from 67% in FY19. Coupled with the still strong order win momentum, SILVERLAKE AXIS (SGX:5CP) should continue to benefit from the rising Fintech wave, with its market leader position in the core banking solutions space. The group is also a market leader in Insurtech, providing a collaborative and information exchange platform for the insurance industry.

Order Win Momentum Remains Strong

• Orderbook backlog of about RM300m would keep the group busy for the next few quarters. We are expecting the group to win more orders to extend its visibility. Despite global headwinds, momentum has not slowed down. Silverlake Axis continues to see an active flow of new business enquiries and requests for proposals from existing as well as potential new customers.

Steady 1QFY20 Revenue With Good Growth From Recurring Segments

• Silverlake Axis's 1QFY20 revenue boosted by recurring maintenance income; project income weaker. 1QFY20 registered revenue of RM164.4m (-1% y-o-y). Recurring revenue from maintenance services, enhancement services and insurance processing rose 15% y-o-y to RM122.3m increasing its share of group revenue to 74% in 1QFY20.
• Project related revenue comprising software licensing and software project services, however, declined 29% y-o-y. This decline was largely from a number of core banking projects that were at the advanced stage of completion.

Improvement in GP Margin Offset by Higher Expenses and Tax Rate

• Gross profit margin improved slightly to 64% from 63% in 1QFY19, due to higher margins achieved especially for the recurring revenue segment. Net margins, however, was lower at 28.7%, vs 34.8% in 1QFY19. This was due to higher administrative expenses and interest expense arising from the acquisition and incorporation of XIT Group and Silverlake Investment Group, and an increase in tax rate to 17%, from 14% in FY1Q19.

1QFY20 Net Profit Fell Short of Expectations

• Overall, Silverlake Axis's 1QFY20 revenue accounted for 24% of our full year estimates, in line, but net profit of RM47.2m (-19% y-o-y) fell short at 19%.
• A first interim DPS of 0.3 Scts was declared, similar to the previous corresponding quarter.

Orderbook Backlog of RM300m; Order Win Momentum Remains Strong

• Silverlake Axis’s order backlog is now about RM300m, which would continue to keep the group busy for the next few quarters. Beyond that, Silverlake Axis continues to pursue both core and digital projects.

Despite the Global Headwinds, Momentum Has Not Slowed Down

• Silverlake Axis is still seeing an active flow of new business enquiries and requests for proposals from existing as well as potential new customers. Silverlake Axis continues to see cross-selling opportunities especially in the digital front. Financial institutions need to have robust core banking systems to avoid being rendered obsolete by the rising Fintech trend.
• Silverlake Axis is also a beneficiary of the rising mergers and acquisitions trend of financial institutions, especially in developing countries, as this would lead to the need to revamp and align the core systems. In terms of geographical region, more orders can be expected from Thailand, Indonesia, Vietnam and Sri Lanka.

Trimmed Earnings by 5%; Maintain BUY With Lower Target Price of S$0.57

• We reduced earnings for FY20F and FY21F by 5% each, mainly on higher expenses and tax rate assumption. We raised our tax rate assumption to 20% for both FY20F and FY21F, from 16% and 18% previously, which is higher than 14% in FY19. As such, our Target Price is reduced to S$0.57 (vs S$0.60 previously), still pegged to peers’ average of 21x, and based on Silverlake Axis’s FY Jun 20F earnings.
• Maintain BUY.

Where We Differ

• We have assumed lower gross margin of 61% for FY20-21F, vs 62.6% achieved in FY19, given the more cautious business environment on the back of the prolonged trade war.

Source: DBS Research - 15 Nov 2019