SINGAPORE (July 27): RHB Research is maintaining its “buy” call on software services and solutions provider Silverlake Axis with an unchanged target price of 65 cents on early signs of the start of banks’ capex spending cycle.

According to lead analyst Jarick Seet, banks in Southeast Asia were generally cutting capex in the last few years, which resulted in Silverlake Axis’ orderbook falling as well. The company specialises in providing end-to-end core banking system to banks and other financial institutions.

“Management is bullish, as it believes this is the start of banks’ capex spending cycle,” Seet says in a report on Friday. “Management is encouraged by the latest signs shown by customers, which raised orderbook to 380 million ringgit ($127.4 million), after a few major contract wins.”

More than half of the existing orderbook is expected to be realized in FY19, mainly from two revenue streams – licensing and project services.

“We understand the two revenue streams slumped significantly in FY17 and FY18F, but we expect them to surge in FY19-20. Due to the rise in licensing revenue with 90% gross margins, we expect overall profitability and margins to increase as well,” Seet says.

According to Seet, the banks’ capex spending cycle typically lasts around three to four years. Banks in Malaysia, Indonesia and Thailand, in particular, are in need of upgrading their core banking systems, he adds. And Seet believes this augurs well for Silverlake Axis.

“We believe there are bumper years of PATMI growth ahead,” he says. “As we see it, the business cycle has bottomed and earnings should surge over the next few years. Positive signs from licensing and project services revenue streams in 3Q18 also point towards a strong outlook.”

As at 1.05pm, shares in Silverlake Axis are trading flat at 51.5 cents, at 18.6 times FY19 forecast earnings and a dividend yield of 5.7%.

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