Silverlake Axis

Kim Eng on 23 June 2014

• Initiate at BUY with a DCF-based TP of SGD1.40. At our TP, the implied FY6/15E P/E is 26.6x.
• Entrenched position in growing market with solid expansion in recurring income stream.
• Strong capital management potential with a net cash position of MYR300m.

Initiate at BUY with TP of SGD1.40
Our DCF-based (WACC= 9.3%, terminal g= 3.0%) TP of SGD1.40 implies a 21% upside. Despite the strong 32% share price performance YTD, we expect the solid 16% FY6/14E-17E EPS CAGR
to sustain its re-rating. Furthermore, the highly cash generative nature of its business should support rising dividends.

Reasons to be optimistic

• Entrenched position in the huge addressable Asia-Pacific banking market. Ranked fifth in Asia Pacific and top 2 in Southeast Asia, we expect SAL to benefit from growing IT spending by banks (five-year CAGR= 6.8%). The ongoing drive to upgrade ageing core banking systems will continue to drive sales of its flagship product and allow it to monetize the large installed base of its products.
• Strong momentum in software licencing: leading indicator for recurring income. Software licencing sales increased by 15% YoY in 9MFY6/14 and we expect this to translate into growing recurring income (FY6/14E: 43% of group revenue) over the next few years.
• Strong capital management potential. With an ungeared balance sheet and sizeable war chest of more than MYR300m in cash, SAL could optimize their capital structure by announcing a special dividend or initiating a share buyback program.

Catalysts: Acquisitions by existing customers, new customers. Risks: Key personnel departure, loss of customers, curb in IT spending by banks and removal of tax incentives.