03 March 2014

Silverlake Axis - SEA Finance Software Giant In Making (MAR 2014)

Background of the Company
Silverlake Axis Ltd (SAL) is a leading provider of digital economy solutions and services for major organisations in Banking, Insurance, Payments, Retail and Logistics industries. The Group's Silverlake Axis Software and Services Solutions are delivering operational excellence and enabling business transformations at over 100 organisations across Asia, including 40% of the largest banks in South East Asia.

Under Axis Systems Holdings Limited, the Group was listed on the SGX-SESDAQ on 12 March 2003. It was renamed Silverlake Axis Ltd in 2006 following the acquisition of SAACIS, the Company that owns the Silverlake Integrated Banking Solution (SIBS) and the listing was transferred to the Main board of the Singapore Exchange on 22 June 2011.

Simple Financial Ratio (most of the figures are estimated figures)
No. Outstanding Shares: 2,244,149,108
Last Closing Price (28 Feb 2014): S$0.895
Market Cap: S$2.0B
Estimated latest annualized EPS: S$0.0415
Estimated EPSG: ~ 15%
Estimated PE: ~ 21.55X
Latest DPS Declared: 0.9 cents
Estimated Annualized DPS: S$0.034
Estimated Annualized Dividend Yield: 3.8%
Estimated ROE (roughly calculated): ~ 40%
Estimated PEG (roughly calculated): 1.45X (good if the PEG ratio is below 1.0X)
Estimated Dividend Payout Ratio: ~ 82%

Latest Quarterly Report Performance Summary
Singapore, 11 February 2014 – Singapore Exchange Mainboard listed Silverlake Axis Ltd (“SAL” or the “Group”), a leading provider of Digital Economy Solutions and Services to major organisations in Banking, Insurance, Payment, Retail and Logistics industries, today announced a strong set of financial results for the second quarter and six months ended 31 December 2013.

Q2 and 1H FY2014 Results Review

Business conditions in the region remained positive in Q2 FY2014. Against this background, SAL secured a major ISIS software licensing contract and new project enhancement contracts in Singapore and Indonesia. These new contracts underpinned the healthy revenue growth in software licensing as well as maintenance and enhancement services. The Group also benefited from two large sales of hardware products to customers and boosted revenue from sale of software and hardware products significantly. During the quarter, the Group remained focused on the execution of software implementation service contracts. However, revenue from software project services was lower compared to the previous corresponding period as a major project was progressing towards completion stage. Together with the new source of revenue from insurance processing by Merimen Group, total group revenue climbed 24% to RM125.2 million.

Buoyed by higher revenue, gross profit rose 27% to RM77.4 million in Q2 FY2014. Given the change in revenue mix towards higher margin activities such as software licensing, the Group recorded a slight improvement in gross profit margin to 62%. In addition, better performance by GIT InfoTech Co. Ltd during the quarter added substantially to the Group’s share of profit of associates and contributed to a robust increase of 33% in profit before tax to RM68.8 million. Although improved profitability and higher effective tax rate due to lower tax-exempt income resulted in higher income tax expense, the Group still achieved a healthy 23% growth in net profit to RM60.6 million in Q2 FY2014.

For the six months ended 31 December 2013, the Group recorded 25% increase in revenue to RM226.4 million. In line with the higher revenue, net profit grew 26% to RM111.7 million. To reward shareholders for the solid performance, the Board has proposed a tax-exempt second interim dividend of Singapore cent 0.9 per share for Q2 FY2014. This is 29% higher than the second interim dividend of Singapore cent 0.7 per share for Q2 FY2013.


The Group expects the Asian financial sector to remain resilient in 2014 and will maintain its efforts to capitalise on the business opportunities presented in the region. Dr. Raymond Kwong, Group Managing Director of SAL, commented, “For the rest of the financial year, we will continue to strengthen our order book of software implementation service contracts. We are currently working to pursue new software projects and at the same time, looking to enhance our suite of business enterprise software solutions and services through selective acquisitions. This broadening range of mission critical business and technology capabilities will enable us to provide our customers operating in multi-industries with solutions to excel in a digital economy.”

This press release should be read in conjunction with SAL’s Q2 FY2014 results announcement released on 11 February 2014 to the Singapore Exchange

Use of Proceeds from the Placement of 100,000,000 shares

On 11 June 2013, the Company allotted and issued 100,000,000 million ordinary shares at an issue price of SGD 0.75 per share. Out of the total net proceeds of RM180.3million, RM39.3 million and RM11.2 million have been disbursed and utilised towards the first payment for the acquisition of Cyber Village Sdn. Bhd. on 3 July 2013 and the second tranche payment for the acquisition of 80% equity interest in Merimen Group on 19 November 2013.

The use of the net proceeds is in accordance with that previously disclosed in the Company’s announcement dated 29 May 2013, 3 July 2013 and 19 November 2013. The remaining proceeds from the placement of RM129.8 million is currently being placed as fixed deposits with financial institutions. The Company will continue to make periodic announcements on the utilisation of the proceeds as and when the proceeds are materially disbursed.

My Personal View
As the company is approaching SEA banks for replacing the older system & software infrastructure, and around half of the revenue of the company is from the recurring income basis, I believe that the company could still grow at the pace of double digit for next couple of years. As the company is a cash cow company (generate free cash flow), I believe the dividend yield could be higher as time moves on.

As the estimated PE is above 20X (above my comfort zone), so I would prefer to buy it at PE of below 15X. Nonetheless, I would adjust my own judgement for any catalyst (e.g. project clinched / net profit margin improvement / acquisition and merger activities / dividend policy changes).

This counter is suitable for investors who wish to seek for higher capital appreciation as well as a moderate dividend yield as the company set to maintain a high dividend payout ratio policy for coming years.

The underlying risks come from slowing pace of the SEA banks to adopt Silverlake's finance service solution or any further EPS dilution comes from corporate action (e.g. shares placement happened on June 2013) as well as iliquidity of the counter.

I would do more thorough analysis on how the company could win the contracts from SEA banks from such a short time (it is not easy for a start ups to clinch projects as such fast pace), and how the company could maintain such a high profit margin and recurring income (from their business model analysis) and check if any intangible assets inside the company before making a good decision on this counter.

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