Wednesday, December 18, 2013

Silverlake Axis: Fairly Valued After A Stellar Performance (UOBKH)

Silverlake Axis
Share Price S$0.935
Target Price S$0.91
Fairly Valued After A Stellar Performance

After its outperformance ytd, we think the stock’s current valuations reflect its solid fundamentals and good prospects. FY14 will be a year of new contract wins and fullyear contributions from Merimen Ventures and Cyber Village. Its Chinese associate’s listing could take place in the medium term when China resumes IPOs in 2014. Downgrade to HOLD and maintain target price at S$0.91. Entry price: S$0.80.


STOCK IMPACT
• Background. Silverlake Axis (SAL) provides digital-economy solutions and services to the banking and financial, payments, retail and logistics industries. While it services customers all over the world, its home base is in Asia where its solutions are applied at over 100 customer sites. SAL considers over 40% of the top 20 largest banks in Southeast Asia as its clients. Since founded in 1989, it has maintained a 100% success rate in the implementation of its software applications.

• FY14: A year of new contract wins. With several major projects completed recently or nearing completion, we think SAL currently has the capacity to bid for and take on new contracts. We anticipate a few mid- to large-sized contracts to be announced progressively throughout FY14. A typical mid-sized contract is worth RM50m-60m while a large contract could reach more than RM200m. SAL has been very active in the market and continues to pursue new relationships. With its exceptional track record and market leadership in the region, we see high probabilities of success in its participation in bidding processes, some of which are already at the final stages. SAL has an existing orderbook backlog of close to RM300m.

• Full-year contributions from Merimen and Cyber Village; synergies coming to life. We estimate Merimen Ventures (Merimen) and Cyber Village (CV) contributed about 6% to the group revenue in 1QFY14. We forecast full-year contribution of RM22.5m from Merimen on the back of significant headways since SAL’s entry. The insurance solutions provider is looking to derive growth from Thailand and Indonesia and has introduced new services that allow it to generate higher revenues. We are also positive on CV’s prospects and its potential to bring in new customers for SAL. Bank Rakyat, its first internet banking client since SAL’s acquisition, has already shown interest in implementing SAL’s core banking software as well.

STOCK IMPACT
• New maintenance and enhancement (M&E) contracts to kick in. We expect to see more upside in M&E revenue in the coming quarters as newly-billed contracts flow through. In FY13, segment revenue reached RM174m (44% of group revenue). We think this is likely to reach RM200m in FY14 as completed contracts are converted into M&E contracts.

• Organic earnings growth of 15%, upside from new contracts. Management sees earnings growth of about 15% yoy to be achievable. Initiation of new contracts in FY14 could push this higher. We maintain our full-year earnings projection of RM232.5m (+19% yoy).

• Chinese associate’s listing in the medium term. Plans for the listing of Global InfoTech Co. (GIT), an information technology services firm focused on the financial services sector in China, may be in the medium-term horizon after the China Securities Regulatory Commission announced early this month that it will allow IPOs to resume in Jan 14. This will end a ban that has lasted more than a year. North Asia’s potential is noteworthy given that over 90% of IT systems being used are still internally developed. A successful listing of GIT will allow it to achieve scale in 2-3 years’ time, where it can then take on larger projects and continue to adhere to Chinese banking practices. SAL’s management sees potentially higher margins from Chinese projects given that the cost structure differs from other Asian markets. SAL currently holds a 27% stake in GIT.

 EARNINGS REVISION/RISK
• No changes to our earnings projections. We maintain our 3-year (FY13-16) forecast net profit CAGR of 15.2%.

• Potential upside to FY14F dividend of 3 S cents/share after SAL declared an interim dividend of 0.8 S cents (88% payout) in 1QFY14. This is 60% more than the interim dividend in 1QFY13. We think this is a positive sign of management’s confidence in its performance in FY14. SAL’s cash balance stood at close to RM400m (7 S cents per share) as at end-Sep 13.

• Key risks include failure to secure new contracts and execution risk.

VALUATION/RECOMMENDATION
• Fairly-valued; downgrade to HOLD with target price maintained at S$0.91, based on DCF model. The stock has outperformed the index by 90% ytd. Assuming SAL successfully secures a RM200m contract in FY14, we estimate the potential upside to our target price is about 10%. SAL is currently trading at 23x forward PE. Our target price implies 22x FY14F PE. We continue to like SAL’s solid fundamentals and would look to accumulate closer to S$0.80.

SHARE PRICE CATALYST
• New contract wins.
• Higher-than-expected contributions from Merimen and CV.
• Successful listing of GIT in the near term.
• Earnings-accretive M&As.



Source/Extract/Excerpts/来源/转贴/摘录: UOBKH-Research,
Publish date: 12/12/13

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