DBS maintains 'buy' on Silverlake Axis as order backlog remains strong

Analyst Ling Lee Keng has lowered her TP slightly to 42 cents from 45 cents as order win momentum could be slower in the near term

DBS Group Research analyst Ling Lee Keng has maintained her “buy” rating for Silverlake Axis 5CP with a slightly lower target price of 42 cents from 45 cents previously.

In her report dated May 16, Ling says that Silverlake’s order backlog is “still going strong” into its FY2024 beginning July 1 with a robust deal pipeline, although the company’s order win momentum could be slower in the near term.

“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. Silverlake’s deal pipeline is at a healthy level of RM1.8 billion ($530 million),” she says.

Ling adds that there are RM260.5 million in deals that have a “high probability” of closure in the coming months.

“However, we could see slower order win momentum in the near term as customers remain cautious; negotiations and contracting are taking longer,” notes the analyst.

While financial institutions continue to drive their technological transformation agenda to improve competitiveness, Ling says global growth is expected to slow down in 2023. As a result, Silverlake could see slower order win momentum as customers remain cautious and negotiations and contracting start to take longer to finalise, she explains.

Still, Ling likes Silverlake for its high and “healthy” recurring revenue contribution of at least 60% of the total, and an impressive gross margin of some 60%.

For the company’s nine-month period ended March 31, total recurring revenue — including maintenance and enhancement services, insurance ecosystem transactions and services, and retail transaction processing — increased 5% to RM415.1 million, with recurring revenue contributing approximately 75% of total group revenue.

Revenue over the nine-month period increased 6% y-o-y to RM563.6 million, with contribution from the growth in all revenue segments. Meanwhile, net profit came in at RM133.9 million, 1% lower y-o-y.

But although Silverlake recorded its highest revenue in five years for the nine months ended March 31, its 3QFY2023 ended March 31 performance still came in below Ling’s expectations.

For 3QFY2023, net profit declined 15% y-o-y and 19% q-o-q. Overall, revenue and net profit formed 68% and 64% of the analyst’s full-year forecast, with 21% and 16% coming from the last quarter, below her expectations.

Notably, Ling says that Silverlake’s new open banking platform MOBIUS could be a “game changer” for the company and open the door to new customers. MOBIUS is expected to see a higher adoption rate, while the existing core banking system provides a stable base, she explains.

MOBIUS-related contracts accounted for 37% of project service revenue in FY2022, while about half of MOBIUS-related projects that Silverlake is currently exploring are from potential new customers.

On the back of the expected overall slowdown in order win momentum and a lower margin assumption, she has reduced her earnings forecasts for FY2023 ending June 30 and FY24F by 12% and 11%, respectively.

Ling’s reduced target price of 42 cents is pegged to a price-to-earnings ratio (P/E) of 17x, around 0.5 standard deviations (s.d.) above Silverlake’s four-year average P/E on blended FY2023 and FY2024 earnings.

Key risks to the analyst's investment thesis include a slowdown in IT spending on the back of the weak global economy, which could lead to a lower order book, and concerns about corporate governance issues.

Ling notes that interested party transactions with group executive chairman Goh Peng Ooi’s private companies over the past few years have raised concerns over corporate governance.

As at 2.23pm, shares in Silverlake Axis were trading flat at 32.5 cents.

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