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CGS-CIMB bumps up target price on Silverlake Axis to 44 cents, PhillipCap leaves TP unchanged

Lim Hui Jie
Lim Hui Jie11/18/2022 02:45 PM GMT+08  • 4 min read
CGS-CIMB bumps up target price on Silverlake Axis to 44 cents, PhillipCap leaves TP unchanged
Silverlake Axis managing director Andrew Tan has a goal to see the company hit RM 1 billion im revenue. Photo: Silverlake Axis
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Analysts from CGS-CIMB Research and PhillipCapital have kept their “add” and “buy” recommendations on Silverlake Axis. Their positive calls come in the wake of the company’s business update for the 1QFY2023 ended Sept 30, released on Nov 12.

While PhillipCapital’s Glenn Thum has kept his target price unchanged at 49 cents, CGS-CIMB analyst Andrea Choong has raised her target price on the stock from 42 cents to 44 cents.

In Choong’s report, she says that the company’s quarterly results surpassed her estimates by 12%, forming 28% of her full-year estimates.

The surge in Silverlake Axis’ net profit of RM57.6 million ($17.38 million), up by 64% y-o-y, was largely due to lower-than-expected tax expense of about 14% instead of a 20% run rate, she notes.

The lower-than-expected tax expense, in turn, came about due to the bilateral tax relief claimed in relation to a licensing deal booked in Indonesia, as well as utilisation of written-down allowance of intellectual property rights.

Separately, Choong noted that Silverlake’s operating profit was in line with her forecasts, as higher foreign currency exchange gains on its cash reserves offset its softer q-o-q revenue.

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However, total operating expenses for Silverlake now runs at a higher level, due to increased spend in business development and hiring talent.

Nonetheless, she points out that Silverlake’s management remains positive on its FY2023 business outlook, noting that the company had closed RM136 million of contract wins in 1QFY2023.

Its deal pipeline stood at RM2.1 billion at end-1QFY2023, with about RM282 million worth of these deals in categories that have a high probability of closure.

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Choong also highlights that its secured backlog stood at about RM450 million – a level management deems comfortable, and places it on track to achieve its about RM800 million revenue target for FY2023.

Separately, she also takes note of Silverlake’s other business segments, such as insurance which makes up about 7% of the company’s 1QFY2023 revenue, may be “smaller in size” but “showing good momentum”.

“Revenue from vehicle claims processing activities are recovering as businesses reopen while Fermion, Silverlake’s insurtech offering, is growing at double-digit rates,” Choong adds.

Unlike other companies who have to be wary of a potential recession, Choong says that recession risks are not of dire concern just yet for Silverlake, as banks seek to upgrade their information technology (IT) capabilities and offer new digital products.

PhillipCapital’s Thum broadly agrees with Choong, noting the company’s healthy order backlog and saying that the 1QFY2023 results are “in line” with his estimates.

Thum is of the opinion that the company’s Mobius platform is the differentiator for Silverlake, saying that it allows banks to roll out new digital products in a targeted and timely manner.

More notably, Mobius allows banks to use existing core banking software and propel them to new digital products.

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As such, some potential uses of Mobius include new digital products in credit cards, debit cards, personal loans and deposits.

Being a cloud based software, using Mobius also means that banks have no need to purchase and manage hardware assets.

Most recently, Silverlake signed a deal with one of the largest banks in Thailand and is continuing to see increasing inquiries in the region, he says, adding that “we expect Mobius to generate almost RM100 million of orders over the next two years.”

Furthermore, Silverlake enjoys recurring revenue streams from maintenance and enhancement revenue, which contributed to more than 70% and 65% of FY2022 and 1QFY2023 revenue respectively, and growing at a compounded annual growth rate (CAGR) of 4% despite the Covid-19 pandemic.

Thum concludes “With the opening of borders and economies in ASEAN, we can expect Silverlake’s customers to increase their IT spending to accelerate their digitalization plans to grow.”

As at 1.52pm, shares of Silverlake Axis were trading at 34 cents, with an FY2023 P/B ratio of 2.21x and dividend yield of 2.3%, according to CGS-CIMB.

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