SI Research: Silverlake Axis – A Turnaround In Sight?

At the time of writing, Silverlake Axis (SAL)’s share price is down 31 percent from its peak of $0.58 and changing hands at $0.40 which is just a hair’s breadth away from its 52-week low of $0.39. Despite a challenging 2018, especially on the technology and property related fronts, SAL delivered another strong quarter in the latest earnings release. We shall take a closer look to find out if the company could sustain its performances in the coming quarters.

The Business

Founded in 1989, Silverlake Axis (SAL), formerly known as Axis Systems Holdings, is a Malaysia-based provider of Digital Economy Solutions and Services. Throughout the 30 years, SAL has built an impeccable track record of successful core banking implementations that is used by the top three of the five largest ASEAN financial institutions such as CIMB Bank, OCBC Bank and UOB.

Other than that, SAL’s Merimen insurance platform is Asia’s top insurance software-as-a-service (SaaS) company and is ranked among the global top 10 in terms of claims processing and management solutions. Other than Banking and Insurance industries, SAL also provides services in Payments, Retail and Logistics industries.

SAL has clients in over 30 countries around ASEAN, Africa, Australia, Central Europe, China, Japan, Middle East, New Zealand and South Asia while its main markets are in Southeast Asia, which derived 79.3 percent of the revenue in FY18.

SAL has six business segments, namely Maintenance and Enhancement Services, Software Project Services, Software Licensing, Insurance Processing, Credit and Cards Processing as well as Sale of Software and Hardware Products. SAL relies on its recurring maintenance and enhancement services as their main source of revenue, which accounts for 72.3% of total revenue in FY18.

Revenue By Segment	1Q19	1Q18	FY18	FY17	FY16
Sale of Goods
Sale of software and hardware products	0.2	0.3	8.0	3.4	16.7
Software licensing	25.5	4.0	40.0	41.8	127.9
Rendering of services
Software project services	29.4	11.5	51.8	63.2	100.1
Maintenance and enhancement services	98.3	94.9	392.0	393.0	346.2
Credit and cards processing	5.3	4.5	19.6	18.8	20.1
Insurance processing	7.9	7.2	30.3	29.7	25.2
Total Revenue (RM’m)	166.6	122.4	541.8	549.9	636.3

Financial Performance

(RM’m)	1Q19	1Q18	FY18	FY17	FY16
Revenue	166.6	122.4	541.8	549.9	636.3
Gross Profit	104.6	63.7	304.9	307.5	383.9
Net Profit	57.9	34.1	134.1	863.7	273.9

(Source: Shares Investment)

SAL reported a stellar 1Q19, with revenue and net profit surging 36.2 percent and 70.1 percent to RM166.6 million and RM57.9 million respectively. The strong performance for 1Q19 was largely driven by the project-related revenue which comprising software licensing and software project services.

Software licensing increased significantly by RM21.5 million to RM25.5 million due to early stages of delivery of new larger core banking contracts in Malaysia and Thailand. Meanwhile, contribution from software project services also increased by RM17.9 million to RM29.4 million with the progressive revenue recognised from Thailand and Malaysian projects secured in late FY17 and FY18.

Even though the maintenance and enhancement services revenue only inched up 3.5 percent to RM98.3 million in 1Q19 but this business segment remained the key revenue contributor at 59 percent of total revenue.

In line with higher revenue, gross profit rose 64.1 percent to RM104.6 million and gross profit margin also improved significantly from 52.1 percent to 62.8 percent as a result of a change in revenue mix with a higher proportion of revenue recorded from higher margin software licensing as well as credit and cards processing segment in 1Q19. It is also worth noting that over the past eight years, from FY10 to FY18 period, gross margins were also relatively high at about 60 percent.

Growing Orderbook

In FY18, SAL won three contracts which included two deliveries of core banking systems and an implementation of digital transformation of credit card and lending businesses. Based on the new contracts won, we believe that SAL is at the beginning of an upcycle.

Meanwhile, with the rising Fintech trend, financial institutions will eventually upgrade or enhance their systems to prevent becoming obsolete. SAL can leverage on its market leader position with Fintech capabilities to secure more contracts.

Going forward, SAL will remain focused on implementation of software contracts and projects secured in FY18 and earlier. The progressive revenue recognition from the project-related revenue would likely continue to contribute positively to the revenue and push up gross margin in FY19 and FY20 supported by its relatively higher margin software licensing business.

Acquisition of XInfotech Group

On 9 November 2018, SAL has entered into an agreement to acquire 80 percent stake in XInfotech group, a global provider of software solutions for the issuance and verification of digital identity documents and smart cards, for a consideration of EUR17.6 million.

The XInfotech acquisition provides an opportunity for SAL to enhance and expand its digital economy offerings, particularly in the areas of public and private enterprise digital identity solutions for customer identity economics, social and financial inclusion, security, and payments applications.

In adding XInfotech to the Group, SAL will extend its geographical coverage and business operations internationally with more than 380 enterprise customers in over 80 countries.

Balance Sheet and Valuation

Nonetheless, we like SAL’s comfortable balance sheet in particular. As at 30 September 2018, SAL held RM407.7 million of cash and bank balances but only has RM41.8 million of borrowings. This translates to a net cash position of RM365.9 million or RM0.14 per share. The rock-solid balance sheet should be able to help the company to weather through the harsh market conditions, if any. Furthermore, total equity had also increased from RM523.1 million to RM552 million and the debt-to-equity also stood insignificantly at 0.08 times.

	Stock Price ($)	Price-to-Book	Dividend Yield (%) (Include Special Dividend)
TTM Sep-18*	0.41	6.0	6.1
TTM Sep-17**	0.56	4.2	8.6

* based on closing price on 7 Jan 2019

** based on closing price on 8 Jan 2018

The trailing 12-month dividend yield of SAL was 6.1 percent. Despite its less attractive yield, SAL is currently trading at a premium as compared to a year ago, at six times price-to-book (P/B). That said, we think the current valuation is somewhat demanding. As such, investors looking to accumulate SAL should stay on the sideline and wait for a better entry price.