• Silverlake Axis's FY20 (Jul 2019 to Jun 2020) core net profit of RM143m (-32% y-o-y) was below expectations at 85% of our forecast. FY20 dividend payout ratio lowered to 40% (FY19: 60%).
• Despite cautious business environment, Silverlake Axis was able to grow its orderbook with smaller enhancement projects. Deal pipeline also remains healthy.
• Upgrade Silverlake Axis to ADD, as we believe the worst is over, and see earnings recovery in FY21F.

Silverlake Axis's 4QFY20: Weak Set of Results

• Silverlake Axis (SGX:5CP)'s 4QFY20 (April 2020 to June 2020) core net profit of RM22m (-61% y-o-y) was below expectations, mainly due to weaker contribution from project-related revenue segments. FY20 core net profit made up 85%/89% of our/Bloomberg consensus forecasts.
• Silverlake Axis's 4Q20 topline declined 17% y-o-y due to lower progress billing on project implementations; partially offset by recurring revenue (69% of FY20 revenue) which expanded 8% y-o-y.
• Silverlake Axis announced final DPS of 0.3 Scts, bringing FY20 dividend payout ratio down to 40% (FY19: 60%).

Expecting a Better FY21

• While large core banking deals continue to be a challenge to close due to the cautious business environment, management noted that its banking clients continue to spend on smaller enhancement projects. Silverlake Axis’s orderbook grew to RM390m as at end-Jun (end- Mar 2020: S$320m).
• With strong order backlog and lockdown measures easing globally, we expect Silverlake Axis’s project-related revenue to stage a strong rebound in FY21F (+22.5% y-o-y). Recurring revenue segments should also continue to grow at a stable pace; we forecast Silverlake Axis to achieve topline growth of 9.2% y-o-y in FY21F.

Cloud-based CBS a Potential Medium-term Growth Driver

• In Aug, Silverlake Axis launched its digital suite Mobius, a cloud-ready core banking system (CBS) which can be made available as a software-as-a-service (SaaS) offering. Active enquiries for this initiative bolstered Silverlake Axis’s potential order pipeline to RM1.6bn currently (end-Mar: RM1.2bn).
• We believe the SaaS model can help minimise capital outlay required for banks, thus lowering barriers to adoption. We have yet to factor this potential into our model.

Upgrade Silverlake Axis to ADD

• We upgrade Silverlake Axis from Hold to ADD as we believe the worst is over, and expect earnings recovery in FY21.
• Our Target Price is pegged to a higher CY21F P/E of 16.3x (0.5 s.d. below Silverlake Axis’s 10-year historical average), from 11.8x (1 s.d. below mean).
• Our FY21-22F EPS forecasts are raised by 4.1%-4.9% to reflect higher project-related revenue assumptions.
• Upside risks include major core banking contract wins or Silverlake Axis cashing out on its stakes in Global Infotech.
• Deferred tech spending by banks in ASEAN is a key downside risk to our call.

Source: CGS-CIMB Research - 27 Aug 2020