• Silverlake Axis's 1HFY6/20 core net profit of RM100m (-15% y-o-y) was slightly below expectations at 48% of our FY20F forecast.
• Cautious business environment continues to hurt Silverlake Axis’s order wins, as clients hold off committing to larger projects.
• We believe an earnings decline is inevitable in FY20F due to higher opex and tax rate. Reiterate HOLD. Target Price SGD0.38

2QFY20: Uninspiring Set of Results

• Silverlake Axis (SGX:5CP) reported 2QFY6/20 core net profit of RM52.8m (+11.9% q-o-q, -10.9% y-o-y). 1H20 NP made up 48% of both our and Bloomberg consensus full-year numbers.
• Topline rose 12.8% y-o-y mainly due to higher sales of software and hardware products (up 28x) and insurance processing revenue (+24% y-o-y); while revenue growth from project-related and maintenance & enhancement service (MES) segments were weaker. (Silverlake Axis Announcements)
• 2Q20 margins were compressed due to
  1. unfavorable revenue mix resulting in lower GPM, and
  2. higher effective tax rate due to loss of pioneer status of a Malaysian subsidiary.
• Quarterly dividend was lowered to 0.3Scts (2Q19: 0.4Scts), implying a payout ratio of 46%.

Slower Project Wins Due to Cautious Business Environment

• Management noted that the business environment remains cautious, and clients are preferring to carry out incremental enhancements rather than committing to larger one-off projects. While the level of enquiries remains active, banks are hesitant to proceed with final decisions for new core banking system implementation.
• We estimate Silverlake Axis’s orderbook stood at RM280m as of end-Dec 19 (end-Sep: S$320m), mainly made up of enhancement contracts. We forecast Silverlake Axis to record flattish project-related revenue in FY20F; while revenue from MES segment could grow 12% y-o-y.

Earnings Decline Inevitable in FY20F

• However, with higher opex as Silverlake Axis expands to drive growth in non-banking segments, and higher effective tax rate kicking in this year, we believe an EPS decline (-3.4%) is inevitable in FY20F.
• Management also indicated it would conserve cash for M&As to beef up its digital capabilities, especially in the insurance processing space. We thus lower our dividend payout ratio assumption to 50%, which implies 3.6-4.1% dividend yield for FY20- 22F.

Maintain HOLD

• Our FY20-22F EPS forecasts are cut by 0.3-3.2% to reflect slower earnings growth in the absence of large-sized project wins recently. While valuation appears attractive post the 30% correction over the past year, we reiterate HOLD on the back of weak earnings growth outlook in FY20F and uncertainties over dividend payout.
• Upside risks include major core banking contract wins or higher dividend payout.
• Deferred tech spending by banks in ASEAN is a key downside risk to our call.

Source: CGS-CIMB Research - 13 Feb 2020