SINGAPORE (Nov 21): CGS-CIMB Securities expects faster net profit growth for Silverlake Axis amid digital banking opportunities as core banking systems of Asean banks are being upgraded to deliver digital banking functionality.

Although there is more competition in the digital banking and fintech solutions spaces, CGS-CIMB thinks Silverlake Axis has an edge over rivals, with its track record in the successful implementation of banking systems and retention of major banks as customers.

“We believe these boost its chances of securing system upgrade and enhancement jobs from its customers, while generating recurring revenue from the maintenance of their existing systems,” says lead analyst Colin Tan.

Since a short-seller report surfaced in 2015 alleging that there were elements of fraud surrounding the significant interested party transactions (IPTs) between Silverlake Axis and the Silverlake Group, IPTs have fallen below 10% of revenue and expenses in FY18 from 29% and 23%, respectively, in FY15, according to CGS-CIMB.

“However, we think Silverlake could do more to enhance the transparency of its IPTs to restore investors’ confidence in the stock,” says Tan.

The analyst is forecasting FY19-20F core EPS growth of 10-58% in anticipation of strong core net profit recovery of 58% in FY19F, with new core banking contracts secured in 2HFY18, a potential slew of digital, core banking enhancements and upgrades by its customers.

CGS-CIMB is anticipating strong core net profit recovery of 58% in FY19F on the back of core banking contracts secured in 2HFY18, as well as a potential slew of digital, core banking enhancements and upgrades by customers ahead.

“Potential re-rating catalysts are: 1) more core banking system contract wins, and 2) acceleration in digitalisation and enhancements by customers in Malaysia, Indonesia, Thailand and other Asean countries,” says Tan.

CGS-CIMB has ascribed a 17.6x FY20F P/E multiple at 10% discount to regional peers’ average and added back net cash and investments to derive a sum-of-parts (SOP) target price of 56 cents.

Year to date, shares in Silverlake Axis are down 29.3% to 41 cents.