• Silverlake Axis's 2QFY21 core net profit of RM34.6m (+5% q-o-q, -27% y-o-y) below expectations due to slower-than-expected recovery in project-related revenue. Order win momentum remains positive and should support sequential earnings recovery in upcoming quarters.
• Reiterate ADD on Silverlake Axis with a lower target price of S$0.33, based on 14.2x CY22F P/E.

Silverlake Axis's 2QFY21 Earnings Below Expectations

• Silverlake Axis (SGX:5CP)'s 2QFY21 (Oct 2020 to Dec 2020) core net profit of RM34.6m (+5% q-o-q, -27% y-o-y) was below expectations; 1H core net profit made up 37%/39% of our/Bloomberg consensus FY21F forecasts.
• While Silverlake Axis's topline continued to see sequential recovery to RM160.5m in 2Q (+8% q-o-q, -16% y-o-y), the pace of recovery was slower than expected due to continued weakness in project-related revenue. Margins were also compressed on a y-o-y basis given
  1. unfavourable revenue mix resulting in lower GPM and
  2. higher effective tax rate due to loss of pioneer status by a Malaysian subsidiary.
• Given that economic conditions still remain uncertain, Silverlake Axis decided to defer its dividend payment decision to year end.

Order Win Momentum Remains Positive

• While larger 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 incremental enhancement.
• Order wins picked up in 1HFY21, with Silverlake Axis clinching RM180m worth of new orders (2HFY20: RM120m). Silverlake Axis's management is hopeful of securing more orders in the coming quarters, with continued engagement with customers on the upgrade roadmap
  1. to its new cloud-based core banking system (CBS), Mobius, as well as
  2. in response to the end-of-life of one of its delivery service processors (DSP).
• Unlike previous versions of CBS which requires significant spending on product licensing and implementation, Mobius can be made available as a software-as-a-service offering, and the ability to carry out modular upgrades to transition into this new CBS can help minimise capital outlay by banks, thus lowering the barrier to adoption.

Expect Continued Recovery in Quarters Ahead

• We expect Silverlake Axis to continue reporting sequentially stronger earnings in upcoming quarters, as it continues to execute a healthy order backlog of RM260m.
• Helped by an easier comparison base, we believe Silverlake Axis can achieve topline of RM376m (+22% h-o-h; +22% y-o-y) and core net profit of RM99m (+46% h-o-h; +106% y-o-y) in 2H21F.

Reiterate ADD With Lower Target Price of S$0.33

• Maintain ADD for Silverlake Axis as we expect further earnings recovery in 2HFY21F.
• We cut our Silverlake Axis's FY21-23F EPS forecasts by 7.3%-9.5% to reflect lower project related revenue assumptions. Our target price for Silverlake Axis is lowered to S$0.33 as we roll forward our valuation to end-CY22F, now pegged to 14.2x P/E (0.75 s.d. below Silverlake Axis’s 10-year historical average).
• Deferred tech spending by banks in ASEAN and lower dividend payout ratio for FY21F are key --> downside risks to our call.

Source: CGS-CIMB Research - 10 Feb 2021