• Silverlake Axis's FY20 revenue stable despite COVID-19; net profit boosted by lower tax rate. Without tax benefit, net profit would have plunged 40%.
• Weak project related revenue offset by stronger recurring revenue from Maintenance and Insurtech.
• Healthy project pipeline, with RM300m close to signing. Expect a better FY21F.

Silverlake Axis's FY20 Revenue Stable Despite COVID; Net Profit Boosted by Lower Tax Rate

FY20 revenue stable; weak project related revenue offset by stronger Maintenance and Insurtech.

• Silverlake Axis (SGX:5CP)'s FY20 full year revenue at RM663.7m was a marginal 3% reduction from FY19.
• Software licensing revenue was down 44% to RM56.1m and project services revenue down 28% to RM74.3m. The Maintenance and Enhancement, and Insurtech divisions grew by 9% and 4% respectively.
• On a quarterly basis, Silverlake Axis's 4QFY20 revenue of RM156.8m was 17% lower y-o-y, mainly dragged down by the slowdown in project related segments. Insurtech was also weak, down 30% y-o-y, impacted by governments movement restriction orders that affected transaction volumes.

Robust growth momentum in recurring revenue segments.

• Recurring revenue (from Maintenance and Enhancement, and Insurtech divisions), remained strong, representing 75% of total revenue in FY20, vs 67% in FY19.

Lower gross margin due to lower contribution from project related segment.

• Silverlake Axis recorded gross profit of RM391.7m in FY2020, 8% lower y-o-y. Gross profit margin of 59% was also lower than the 63% in FY19, mainly due to lower contribution from higher margin business segments such as software licensing and software project services.

Net profit boosted by lower tax rate; without the tax allowance, net profit would have plunged 40%.

• FY20 pretax profit of RM212.6m (-25.3% y-o-y) was in line but net profit of RM184.7m (-24.8% y-o-y) was boosted by lower tax rate of 13%, vs 26% in 9MFY20. Without the tax benefit, net profit would have plunged about 40%. The lower tax was mainly due to the recognition of deferred tax assets on tax allowance claimable on the intellectual property rights acquired in Singapore in the current financial year.
• The decrease was partially offset by higher tax expenses due to the expiry of pioneer status of a Malaysian subsidiary in 1QFY20. Beyond FY20, we expect tax rate to normalise to close to the 30% level.

Lower DPS; payout ratio 40% vs 60% last year.

• A final DPS of 0.33 Scts was declared. Together with the interim DPS, this works out to a full year dividend payout ratio of 40%, vs 60% in FY19. Silverlake Axis prefers to conserve cash, especially during the current uncertainties due to COVID-19.

Healthy Project Pipeline, With RM300m Close to Signing

• Silverlake Axis's deal pipeline is healthy at RM1.6bn to RM1.7bn, from Southeast Asia, as well as Eastern Europe and Africa. Out of this, about RM300m is close to signing. Though the award of larger contracts in excess of RM100m has been slow, to close the gap, the group is targeting smaller contracts of RM10m each and these include digital contracts which are generally smaller in size.
• With these smaller contracts, Silverlake Axis's orderbook backlog is now about RM390m. Over the last one to two years, new order wins were about RM50m to RM70m per quarter, to be completed within 12 to 18 months from the signing of the contracts, which helps to maintain the orderbook at above the RM200m level.
• In 4QFY20, Silverlake Axis clinched RM41m of new contracts, which was lower than the RM65m order wins in 3QFY20.

Expect a Better FY21F

• The award of a number of projects had been postponed due to the COVID-19. We expect some of these projects to be awarded in FY21F. Furthermore, the pandemic has also led to the acceleration of digitalisation, hence financial institutions need to have robust core banking systems to avoid being rendered obsolete by the rising Fintech trend.

Reiterate BUY on Silverlake Axis With Slightly Higher Target Price of S$0.40

• We have tweaked our FY21F earnings up slightly, mainly to account for the slightly higher gross margin of 60%, vs 56% previously, as we are expecting the resumption of contract wins that were postponed due to COVID, which should contribute to the higher-margin project related revenue.
• Our Target Price of S$0.40 (prev S$0.38) is pegged to Silverlake Axis's 4-year average PE level of 17.6x on FY21F earnings.

Source: DBS Research - 27 Aug 2020