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Broker's take: DBS restarts coverage on Silverlake Axis with 'buy'

DBS Equity Research has re-initiated its coverage on fintech player Silverlake Axis with a "buy" call and a target price of 60 Singapore cents, a 45 per cent upside on the stock's closing price of 41 Singapore cents on Wednesday.

As 10.47am on Thursday, shares in the mainboard-listed firm were trading flat.

The research house said the business software firm's turnaround is in sight, due to its growing project orderbook. Silverlake Axis had an orderbook of under RM50 million (S$16.4 million) in fiscal 2017 but this has grown significantly and currently stands at approximately RM380 million, with the potential to undertake more orders.

DBS Equity Research analyst Ling Lee Keng said: "Silverlake can leverage on its market leader position to secure more contracts asfinancial institutions upgrade/enhance their systems to avoid being rendered obsolete by the rising fintech trend."

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The analyst believes that Silverlake is currently at the beginning of an upcycle based on the value of contracts it has secured, adding that upcycles typically last for about four to six years while a downcycle is about two years.

During previous peak periods, Silverlake was awarded between RM500 million (S$164.9 million)  to RM600 million in contracts per year.

DBS noted that Silverlake's recurring revenue - mainly from software maintenance, enhancement services, and insurance processing -account for close to 60 per cent of revenue in recent years. Gross margins from FY2010 to FY2018 also were at about the same figure.

It expects this trend to continue, supported by the growing higher-margin software licensing business.

Key risks to the brokerage's view are a potential slowdown in information technology spending which might lead to a lower orderbook and concerns relating to corporate governance issues.

Silverlake Axis's core banking system platform is currently used by CIMB Bank, OCBC Bank and UOB. "Its Merimen insurance platform is Asia’s top insurance software-as-a-service company and ranked among the global top 10 in terms of claims processing and management solutions," DBS said.