Analysts from CGS-CIMB, DBS Group Research and PhillipCapital have maintained their “buy” ratings for Silverlake Axis with increased respective target prices (TPs) of 42 cents, 48 cents and 49 cents from 40 cents, 46 cents and 39 cents previously.
In her report dated Aug 30, CGS-CIMB’s Andrea Choong writes that Silverlake is on a “steady momentum”, posting a 4QFY2022 net profit of $48 million, which was above consensus but below her expectations due to a weaker gross profit margin of 50% compared to a 60% run-rate. The FY2022 ended in June.
She has “toned down” her FY2023 to FY2024 earnings per share (EPS) growth by 3% to 4% mainly to factor in higher taxes, with her TP of 42 cents pegged to a 16x 2023 price to earnings ratio (P/E), 0.5 standard deviations (s.d.) below the mean.
For Ling Lee Keng of DBS, strong contributions from project-related insurance processing, especially in 4QFY2022 have led to Silverlake marking record high revenues for the FY, exceeding its previous high in FY2019 by 8%.
On the back of this “strong order momentum”, she has tweaked revenue for FY2023 and FY2024 by 2% each, but lowered gross margin by 1% point to 60%, to align with current trends. Overall, Ling has not made changes to earnings for FY2023 and FY2024. Her TP of 48 cents is pegged to a higher P/E of 18x from 17x previously, almost 0.5 s.d. from the four-year average P/E.
“License and project revenues, which were challenging over the last two years, exhibited a strong recovery, as evidenced from the FY2022 results. The banking business continues to be
the key contributor,” says Ling.
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“With a rising interest rate environment, which is beneficial to banks, coupled with the gradual recovery of the global economy, we can expect more contract wins going forward,” he adds.
Meanwhile, Glenn Thum of PhillipCapital says that “stable”, recurring revenue growth has added to momentum. He raised his FY2023 patmi by 18% to RM209 millon, while his TP of 49 cents is pegged to 20x price to earnings ratio (P/E) for FY2023, at 92% of peer valuations of around 22x P/E and 13% higher than the historical average P/E of 17.7x.
“Maintenance revenue grew 8% y-o-y while enhancement services revenue grew 2% y-o-y. The increase was from the commencement of new maintenance contracts upon completion and cutover of several key implementation projects as well as new enhancement contracts secured from customers,” he says.
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Thum adds that insurance ecosystem transactions and services revenue also increased by 15% y-o-y as vehicle claims processing activities recovered, while the addition of processing activities from new Hong Kong customers upon completion of system integration also contributed positively.
Choong notes that despite “heftier opex” for the quarter, the company’s 4QFY2022 topline growth was “robust”, with a 17% year-on-year (y-o-y) increase, supported by the strong project-related revenue which saw 37% y-o-y growth. This was driven by the delivery of software licensing contracts, banking deals secured in Indonesia and Thailand, as well as the implementation of two Mobius contracts.
She says that Silverlake management is “upbeat” on the back of this steady business momentum, with contract wins worth RM113 million ($35.26 million) in 4QFY2022 bringing FY2022 total order wins to RM508 million, significantly higher than FY2021’s total of RM326 million.
Silverlake’s deal pipeline was also solid at RM1.9 billion at end the end of 4QFY2022, with around RM250 million in deals in the final stages of negotiation and marked with a “high probability of closure”, says CGS-CIMB’s Choong, adding that the secured backlog going into
FY2023 stands at around RM570 million or around 77% of FY2022 revenues, providing a firm base for steady earnings growth in FY2023.
“One of these deals was recently closed in Singapore to integrate four other markets — Malaysia, Indonesia, Thailand and Vietnam — onto its platform. Thus, we believe that steady margin upside from Fed rate hikes should support banks’ earnings growth in FY2023, supporting continued investment in digitalisation and core banking solutions that Silverlake provides,” writes the CGS-CIMB analyst.
DBS’s Ling believes that Mobius, a new open banking platform, could be a “gamechanger”, opening a door to new customers. It is expected to see a high adoption rate with the existing core banking system providing a stable base, he says. Mobius-related contracts accounted for 37% of the project services revenue in FY2022, and about half of Mobius-related projects that Silverlake is currently exploring comes from potential new customers.
He remains optimistic on Silverlake’s business given its market leading position in the core banking solutions segment. Digitalisation is now a necessity instead of something that’s “good to have”, Ling notes.
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According to Thum, Silverlake should trade at a higher premium to its historical P/E with the introduction of Mobius and the resumption of bank IT spending after the pandemic.
Although interest from Thailand since the delivery of Silverlake’s first Mobius deal to the country has been strong, and she expects this to continue to drive momentum, Choong cites execution risks in rolling out Mobius on a large scale as one of her downside risks.
For Ling, key risks lie with a slowdown in IT spending on the back of the weak global economy, leading to a lower orderbook, and concerns on corporate governance issues. “Related party transactions with founder and group executive chairman Goh Peng Ooi’s private companies over the past few years have raised concerns on corporate governance,” he points out.
As at 1.50pm on Sep 2, shares in Silverlake Axis were trading 0.5 cents or 1.37% down at 36 cents.
