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Broker's take: CGS-CIMB upgrades Silverlake to 'add', expects earnings recovery

CGS-CIMB on Thursday said it believes the worst is over for Silverlake Axis, and expects the fintech firm's earnings to recover in FY21 ending next June following a weak set of results for its latest quarter.

The brokerage thus upgraded the mainboard-listed company to an "add" call from "hold", and upped the target price to S$0.39, from S$0.26 previously.

Shares of Silverlake fell 0.5 Singapore cent or 1.6 per cent to trade at 30 cents as at 1.52pm on Thursday.

Analyst Ong Khang Chuen increased his earnings per share forecasts by about 4.2 per cent for FY21 and by 4.9 per cent for FY22, to reflect higher project-related revenue assumptions.

Silverlake provides core banking software in South-east Asia, where it deploys proprietary software to major organisations in banking, insurance, payments, retail and logistics industries.

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The cautious business environment caused by the coronavirus outbreak has taken a toll on the company's financial performance, with net profit falling by 12 per cent on the year to RM59.1 million (S$19.4 million) for its fourth quarter ended June 30, 2020.

In results released on Wednesday, Silverlake said the pandemic affected its ability to close deals in a timely manner "due to changes in customers' priorities" and lockdown measures. Its top line declined by 17 per cent to RM156.8 million for the quarter.

The company's margins were also compressed by an unfavourable revenue mix and a higher effective tax rate after a Malaysian subsidiary's pioneer status expired, CGS-CIMB noted. Silverlake had said that its full-year gross profit margin shrank due to lower contribution from higher-margin business segments such as software licensing and software project services.

Nonetheless, while large core banking deals were a challenge to close, the group's banking clients continued to spend on smaller incremental projects, and Silverlake believes this trend will be sustained through FY21. Its orderbook has grown to around RM390 million as at end-June, from RM320 million at end-March, CGS-CIMB noted.

"With a strong order backlog and lockdown measures easing globally, we expect Silverlake's project-related revenue to stage a strong rebound in FY21 (up 22.5 per cent year on year)," Mr Ong wrote.

Recurring revenue segments should also keep growing at a stable pace, he added.

CGS-CIMB forecast Silverlake's top line to increase by 9.2 per cent for FY21.

In addition, a potential medium-term growth driver is the firm's recently launched cloud-ready core banking system, which can be made available as a software-as-a-service (SaaS) offering.

Active enquiries for this initiative have bolstered Silverlake's potential order pipeline to about RM1.6 billion currently, up from RM1.2 billion at end-March, Mr Ong said.

"We believe the SaaS model can help minimise capital outlay required for banks, thus lowering barriers to adoption," he added. CGS-CIMB has yet to factor this potential into its model.

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