PhillipCapital has initiated “buy” on Silverlake Axis (SAL), a Singapore-listed customised software solutions and core banking systems provider.
The brokerage has also given the company a target price of 38 cents, which is pegged to an FY2022 P/E of 20x. The target price is also an 11% upside to peer valuations of around 18x P/E, writes analyst Glenn Thum in his June 6 report.
“Our target P/E of 20x is 15% higher than the historical average PE of 17.5x. In our view, Silverlake should trade at a higher premium to its historical P/E with the introduction of Mobius and resumption of bank IT spending post pandemic,” he adds.
To Thum, SAL’s Mobius cloud-based banking software is the differentiator to the company’s business. The software, which was launched in 2020, allows banks to roll over new digital products in a targeted and timely manner. Banks can utilise the Mobius with its existing core banking software and propel them to new digital products.
Mobius’ potential uses include new digital products in credit cards, debit cards, personal loans and deposits.
Mobius’ cloud-based nature also means banks are able to avoid purchasing and managing hardware assets.
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To be sure, SAL recently signed a deal with one of the largest banks in Thailand and is continuing to see increasing inquiries in the region.
On this, Thum expects SAL’s Mobius software to generate almost RM100 million ($31.3 million) worth of orders over the next two years.
In his report, Thum also likes SAL’s prospects as the company had generated stable recurring revenue from its flagship banking software, Silverlake Integrated Banking Solution (SIBS) as well as maintenance and enhancement, in spite of the pandemic.
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During the Covid-19 pandemic, the company’s recurring maintenance and enhancement revenue contributed to 72% of its revenue for the FY2021, and grew at a CAGR of 4%.
“With the opening of borders and economies in Asean, we should expect Silverlake’s customers to increase their IT spending to accelerate their digitalisation plans to grow,” Thum says.
Silverlake’s long track record and proven client base in Southeast Asia is also a positive factor for investors, in the analyst’s view.
Its core banking platform is being used by three of the five largest Southeast Asian-based financial institutions. The company has also largely retained all its clients since bringing them on board its platform.
Furthermore, SAL’s project pipeline is at a healthy RM1.7 billion, with a record-high order backlog of RM450 million, representing a growth of 50% y-o-y. “This should keep them busy for the next one to two years,” Thum says.
“Silverlake is beginning to close more deals and is witnessing an uptick in inquiries about its financial services market solutions and capabilities. Silverlake should be able to secure its foothold in Asean and look to expand into other regions,” he adds.
As core banking is evolving to meet the challenges of significant shifts in the banking industry, especially in digital banking, SAL is in good place to benefit from these shifts.
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The way Thum sees it, “it is essential to provide enabling technologies that increase business agility and reduce operational costs in order to adapt to these changes”.
However, key risks, according to the analyst, include a weakening economy, which could see a slowdown in spending. Increasing competition is yet another risk to SAL’s prospects.
“While Silverlake is the banking solutions provider for 40% of the 20 largest banks in Southeast Asia, it is relatively small compared to the global players in the industry. These global players have gained contracts in Malaysia and Southeast Asia, a trend that is expected to continue as key banking systems reach the end of their life cycle in the coming years,” Thum says.
Shares in Silverlake Axis closed 0.5 cent lower or 1.59% down at 31 cents on June 6, or an FY2022 P/B of 2.2x and dividend yield of 3.2%.
