Analysts have trimmed their target prices for Silverlake Axis, following lower-than-expected earnings, no thanks to unfavourable forex and higher tax.
The company, which specialises in providing software and IT services for the regional financial industry, reported core net profit of $36.3 million for FY2023 ended June, down 24% y-o-y but up 8% q-o-q.
In her Aug 28 note, CGS-CIMB's Andrea Choong points out that although the company's revenue and operating expenditure were in line, its core net profit was hurt by unfavourable forex, as well as adjustments for its put and call options on its associates.
"Higher taxes amid the absence of government concessions worsened the miss," writes Choong, who has maintained her "add" call but reduced her target price from 41 cents to 37 cents, to factor in a higher tax rate for FY2024 and FY2025.
In the final quarter of FY2023, the company won new contracts worth RM94 million, which brings its total order book to RM635 million, up 27% y-o-y from what it secured in the preceding FY2022.
It has built up a deal pipeline of RM1.5 billion, with RM220 million worth deemed to have a "high probability" of getting closed.
See also: Test debug host entity
The company is targeting revenue of some RM850 million for the current FY2024.
The company has been dealing with a shortage of talent and its focus now is to make sure that it can meet project requirements.
"While we see Silverlake Axis' strong order win momentum, we bake in some conservatism in investments by banks given potential Fed rate cuts starting from January 2024," notes Choong.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
In her separate note on Aug 27, Ling Lee Keng of DBS Group Research has maintained her "buy" call and similar to CGS-CIMB's Choong, reduced her target price to 35 cents from 42 cents.
Ling has cut her earnings estimate for the current FY2024 by 10% to account for lower margins and a higher tax rate assumption. The reduced target price of 35 cents is pegged to 15x FY2024 earnings.
Key risks flagged by Ling include a slowdown in IT spending because of a weaker economy, and also corporate governance concerns related to controlling shareholder Goh Peng Ooi.
Nonetheless, Ling is upbeat that Silverlake Axis is seeking out new growth such as trying to ride on the AI trend within the financial services industry.
In recent years, as the company actively booked a higher proportion of recurring income streams versus one-off project revenue, there's better earnings visibility too.
"We like Silverlake for its higher recurring revenue, which is around 75% of total revenue, and attractive gross margin of close to 60%," notes Ling.
Silverlake Axis changed hands at 26 cents as at 4.07pm, unchanged for the day and down 27.78% year to date.
