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BROKER'S TAKE

Silverlake earnings likely to recover, SaaS offering may drive growth: CGS-CIMB

Singapore

CGS-CIMB on Thursday said it believes the worst is over for Silverlake Axis, and that it 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 upgraded the Mainboard-listed company to an "add" call from "hold", and upped its target price from S$0.26 to S$0.39.

Shares of Silverlake fell S$0.005 or 1.6 per cent to S$0.30 at Thursday's close.

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

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Silverlake offers core banking software in South-east Asia, for organisations in the banking, insurance, payments, retail and logistics industries.

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.

In results released on Wednesday, Silverlake had said that the pandemic had affected its ability to close deals in a timely manner "due to changes in customers' priorities" and the lockdown measures.

Its top line tumbled 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 with the expiry of the pioneer status of a Malaysian subsidiary, 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; Silverlake believes this trend will be sustained through FY21. Its order book grew to around RM390 million as at end-June, from RM320 million at end-March, CGS-CIMB noted.

Mr Ong wrote: "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)."

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, 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."

CGS-CIMB has yet to factor this potential into its model. Upside risks to the brokerage's call include major core-banking contract wins or Silverlake cashing out its stakes in Global Infotech.

A key downside risk would be deferred tech spending by banks in South-east Asia.

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