Towards Financial Freedom
SILVERLAKE AXIS - Appro aching our fair value
Silverlake Axis (SLA)'s 1QFY13 results came in largely in line with our estimates. Despite revenue falling 15% YoY to RM80.1m, PATMI rose 42% YoY to RM39.5m with more revenue contribution from the software licensing and maintenance and enhancement services segments which yield better margins. Most notably, the recurring maintenance revenue stream continues to strengthen with better margins. Though the current order backlog remains healthy, it has been depleting over time since the group last won a major contract from CIMB. The stock had a good run, rising 56% since our initiation, and is now approaching our target price. Downgrade to NEUTRAL as we wait for major contract win in order to ensure profitability growth going forward. Our new TP of S$0.50 is based on 14.9x FY13 P/E, in line with its peers' average.
Maintenance segment is the highlight. While revenue from software licensing fluctuates from time to time depending on project milestone, the 38% YoY jump in maintenance revenue is sustainable. As expected, upon installing many new SIBS systems in the past year, the group automatically secure many new product-life-long maintenance contracts, generating attractive cash flow for the years to come. Moreover, the gross margin for maintenance business has been enhanced from about 50% a year ago to 60% now as a result of maintenance fees hike and economies of scale.
Need for order backlog boost. We noticed that the order backlog has been depleting since SLA won the major CIMB contract more than two years ago. We estimate that the group currently has an outstanding project backlog of approximately RM360m, which is about 1.8x of FY12's project related revenue. Though this remains healthy, it is time for the group to secure new contracts if it were to grow its profits. We believe that SLA is currently in the process of pursuing four new customers with two of them being financial institutions in Southeast Asia.
Source: OSK
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