CGS-CIMB Research’s Andrea Choong has maintained her “add” call and raised her target price for Silverlake Axis from 35 cents to 37 cents, after it seems to be on track for a recovery.
Silverlake Axis posted a core profit (adjusting for a one-off expense for the remeasurement of a put liability and derivative asset) of RM61 million ($19.5 million) in 4QFY2021 ended June, which was 58% higher q-o-q and 175% up y-o-y.
4Q revenues recovered across almost all operating segments, she notes. “While full-year contributions from software licensing and project services were dampened by clients’ deferments of larger ticket deals to 2HFY2021, recurring revenues from maintenance and enhancement services which made up 76% of revenue were a bright spot, rising 3% y-o-y in FY2021,” she writes.
Gross profit margin “remained sturdy” at 60% in FY2021, compared to 57% in FY2020. The company declared a distribution per share of 0.52 cents in 4Q, implying a lower payout ratio of 28% in FY2021, compared to 40% in FY2020 and 59% in FY2019.
See also: Silverlake Axis posts 23% drop in FY2021 earnings to RM143.1 mil
Choong says that Silverlake Axis’ management’s outlook for FY2022 is rather optimistic as investment sentiments for digital solutions and software enhancement among its FI clientele return.
Furthermore, she notes that order win momentum has improved, with the company clinching RM100 million worth of deals in 4Q, bringing FY2021 order wins to RM326 million.
“With its secured order backlog standing at about RM440 million as at end-Jun 2-21 and a gradual easing of lockdown measures globally, we see scope for a rebound in project-related segments, and forecast about 8-11% y-o-y topline growth in FY2022-2024.
Lastly, she highlights the new solution that Silverlake Axis is rolling out to its clients, named Mobius. Choong calls its value proposition “compelling” and adds that it will likely remain the company’s key growth driver going forward.
She elaborates that the value proposition of this cloud-based core banking system (CBS) lies in its relatively short implementation timeframe and lower upfront costs, as total costs are spread over 3-5 years.
Choong also observes that it is seeing success in offering this product to less digitally-advanced banks given Mobius’s flexibility to launch single monoline products (e.g. credit cards) according to the bank’s desired pace.
Active enquiries (both Mobius and CBS upgrades) have boosted Silverlake Axis’s potential pipeline order to about RM1.45 billion, with around RM325 million of these in the final stages of negotiation.
Choong concludes by saying that growth prospects are becoming clearer now as clients resume project negotiations with Silverlake Axis. “As management hints at retaining capital for possible M&As, we lower our FY2022-2023 DPS estimates, at a lower about 30% payout ratio (from about 40% previously).”
DBS analyst Ling Lee Keng has also maintained her “buy” call on the company, with a higher target price of 38 cents from 33 cents.
While she also agreed broadly with Choong’s assessment of Mobius, calling it a “game changer” and noting that the company is beginning to close more deals and is seeing an increase in enquiries in its range of solutions and capabilities for the financial services market sector in countries like Malaysia, Indonesia, and Thailand.
Ling also likes Silverlake for its high recurring revenue contribution of at least 60% of total, and impressive gross margin of about 60%. She notes that in FY2021, recurring revenue formed 81% of total revenue.
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She remains optimistic about the stock, “given its market leader position in the core banking solutions segment. Digitalisation has now become a necessity instead of something good to have,” she writes.
Shares of Silverlake closed at 28 cents, with a FY2022 price to book ratio of 1.9 and dividend yield of 2.47%, according to CGS-CIMB’s estimates.
