Silverlake Axis

UOBKayhian on 18 Sept 2012

Valuation
· Based on consensus estimates, this stock is trading at 12.9x PE (year to June). The group is targeting an organic growth of 15% per year which could be conservative should it secure earnings-accretive M&A given its strong cash balance.
Investment highlights
· Visible earnings. The group’s existing orderbook is RM400m, or 1x FY12 earnings, providing earnings visibility for the next 12-18 months. Potential new orders are projected at RM180m, which include customer extensions or new projects that are at various negotiating stages. Group gross margin was also healthy at more than 50% in FY11-12. Although gross margin dropped to 54% in FY12 (FY11: 60%), this was due to some clients opting to combine their contracts with the sale of hardware products, which typically carry lower gross margins of 6-8%.
· Building up recurrent earnings. In FY12, 37% of its group revenue, or RM147m, came from maintenance and enhancement services. This segment is resilient as all its existing clients for software project services would eventually require maintenance and enhancement services. Management plans to increase this to RM200m by 2015, which should provide a gross profit base of RM100m. As for its project and contract services customers, 50% of the clients also opt for upgrades. Maintenance contracts are re-priced up every 2-3 years, with each re-pricing amounting to a 15-20% increase in contract value to help defray rising costs.
· Leading Southeast Asia banking IT services provider. Silverlake has a strong presence in Southeast Asia. On any given day, some 60-70% of banking transactions in Malaysia, Singapore and Indonesia are supported by Silverlake’s services. The group’s clients include Maybank, CIMB, Hong Leong, OCBC and UOB Bank. New markets that Silverlake is considering include Thailand and the Philippines (where its market share is a modest 20-30%). Beyond Southeast Asia, management is looking to expand in China and Japan. Its expansion into China will be spearheaded by its associate Global Infotech, which is targeting a listing (on the Shenzhen Exchange) towards the end of the year.
· Dividend policy/financials. The group has a dividend payout policy of at least 40% on a quarterly basis. However, it has been paying more than 50% of net profits. Its latest payout was 65% in FY12. Financials were also very healthy, with a net cash balance of RM94.2m (or S$0.02/share).