Thursday, February 20, 2014

Silverlake Axis -Strong growth from recurring MES income (Philip)

Silverlake Axis Ltd
Target Price (SGD) 1.02
Forecast Dividend (SGD) 0.04
Closing Price (SGD) 0.90
Strong growth from recurring MES income

•Revenue up 24% y-y, 24% q-q at RM125 million from higher income from software licensing and maintenance and enhancement services
• Net income up 23% y-y, 18% q-q at RM61 million, from higher tax expenses due to lower tax-exempt earnings for the quarter
• Maintain "Accumulate”, with unchanged TP of S$1.02

Silverlake Axis (SAL) announced its 2Q14 results on 11 Feb 2014. Growth in software licensing was contributed by a major ISIS software licensing contract secured during the quarter. New project enhancements projects secured in Singapore and Indonesia contributed to the strong growth in maintenance and enhancement services. EBITDA margin was higher at 55.9%, due to higher margin contribution from software licensing.

Net profits increased 23% y-y, 18% q-q from higher tax expense at RM8.2 million for the quarter. This is due to lesser tax-exempt earnings recognised compared to prior periods. As briefed by the management, about 70% of the Maintenance and Enhancement services income is tax-exempt, benefiting from centralisation of its maintenance business. Software licensing revenue is subjected to a low withholding tax rate of about 10%.

How we view this
We continue to remain positive on Silverlake Axis with excellent growth potential in our view. Management briefed that SAL may potentially secure a major contract worth ~RM$300m from RHB bank to implement its core banking system. soon. We understand that shortlisted bidders for the contract are down to only two players, with SAL as one of the two contenders. We believe the potential RHB deal should be in the final stage of evaluation and the outcome is expected to be announced soon.

We also like Silverlake Axis for its current attractive dividend yield of > 4% as an interim dividend of 0.9 Scents per share was declared for the quarter.

Investment Action
We adjust our forecasts to reflect 2Q14 results. As current valuation remains high, we maintain our "Accumulate" rating with TP of S$1.02 while noting SAL's excellent growth potential.

Progression of CIMB's 1 Platform project
In 2011, SAL won a major contract from CIMB to implement a unified banking platform across Malaysia, Indonesia, Singapore and Thailand. Implementation for Singapore and Thailand have already been completed and implementation in Malaysia was recently completed in Feb 2014. Completion of core banking implementation in Malaysia would add on to SAL's recurring Maintenance and Enhancement services revenue. We think RM$200m in maintenance and enhancement services revenue would be achievable in FY2014F, which was guided by management. Project work for the Indonesian offices would begin soon in Mar 2014 and expected to be completed by end 2015.

Current project backlog of ~RM250m
With the current project backlog guided to be slightly under RM250m, this would provide healthy stream of project-based revenue (software licensing and project services) till FY2015. We expect SAL to win further contracts to grow its project backlog to sustain strong growth in earnings.

SAL stands to benefit from potential OCBC-Wing Hang Bank takeover deal
Should OCBC successfully takeover Wing Hang Bank, this could mean potential contracts to integrate Wing Hang Bank's IT systems into OCBC's core banking platform. As OCBC uses SIBS (Silverlake Axis Integrated Banking System) for its core banking system, Silverlake Axis stands to benefit from this takeover deal.

Resubmission of Global Infotech's bid for listing
We understand from the management that Global Infotech Co. Ltd. (GIT Soft), which SAL has a 27% stake in the Chinese associate, has resubmitted its bid for listing on a stock exchange. This is after a year-long freeze on IPO listing in China was lifted recently by the China Securities Regulatory Commission. Management expects the listing, if successful, to be announced by early 2015.

GIT Soft is based in Beijing, China and provides IT services to financial sector. We think the China market provides excellent potential for core banking vendors. Apart from the big state banks which uses in-house banking systems, the mainland's city-based banks as well as foreign banks would be eager to scale up their operations and invest in core banking solutions, according to IDC Financial Insights.

Dividend payout remains high
Higher interim dividend of 0.9 Scents was proposed, bringing total interim dividends to 1.7 Scents per share for 1H14. This was higher than 1.2 Scents interim dividends for 1H13. We estimate the payout to remain high above 80% and dividend yield continues to be attractive at 4.1%. Special dividend seems unlikely, given the 1) high dividend payout and 2) a major portion of its net cash was due to contributions from share placement and sale of treasury shares, whereby net proceeds would be used for business expansion, including potential acquisitions.

Source/Extract/Excerpts/来源/转贴/摘录: Phillip-Research,
Publish date: 13/02/14

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