Silverlake Axis: Attractive Yield With Strong Growth Potential
(BUY, SGD0.72, TP: SGD0.89)
Coming away from our meeting with Management, we see a 16% net profit CAGR for the next two years, with upside potential should SILV’s orderbook replenishment beat expectations. As the counter offers an attractive FY14 dividend yield of 4.7%, we reiterate our BUY call, with a higher SGD0.89 TP (from SGD0.82), based on DCF valuation (WACC: 10.0%, terminal growth rate: 5.0%).
Experienced workforce ensures smooth execution. SILV boasts a strong team of experienced software engineers. Management has done a good job in retaining talent, with a low turnover rate - at 10% at the junior engineer level, and 5% among the senior engineers and project manager. This workforce has, thus far, maintained a 100% success rate in delivering and implementing SILV’s solutions on time, smoothly transforming the company’s order backlog into profitability. Moving into 1Q14, the group successfully completed upgrading works for OCBC Singapore and OCBC Malaysia this month, and is expected to complete the Union Bank project by November.
Topping up the orderbook. Although it has been a while since the group won any major contracts, its project backlog remains healthy at around RM300m, or 1.5x of its FY13 project-related revenue. Management shared that it is currently bidding for seven regional contracts, of which: i) two are in the final stages (only two contenders left), and ii) five are in the shortlist (five contenders left). Amongst these bids, the closest is the RHB Bank contract. We remain confident that SILV would be able to secure the job by October.
New business to propel growth. We expect the SILV’s newly acquired insurance software business (Merimen) to contribute significantly from this year onwards and generate about MYR25m (at a gross profit margin of 65%); subsequently the business should grow at 20% per annum. Meanwhile, we also expect its recently acquired mobile and internet banking software solutions provider, Cyber Village, to enhance its existing banking software offerings and broaden its customer base. As such, we expect SILV to grow 15-17% per annum in the next two years, with potentially even higher growth pending orderbook replenishment.
Publish date: 29/08/13