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Silverlake Axis Ltd - Will it get big OCBC, RHB orders?

14/7/2014 – Silverlake Axis says it has an order book equivalent to two quarters worth of revenue, but it expects to benefit from growing IT spending by banks in the Asia Pacific region.

According to IDC Financial Insights, IT spending for the Asia-Pacific banking market is expected to expand at an annual rate of 6.8% over the next five years, outpacing global growth of 5%.

Maybank Research says the ongoing drive to upgrade ageing core banking systems will continue to drive sales of its flagship product.

The main motivation to upgrade core banking systems is the evolution of the banking business, which, drives growing data volumes, and heightened regulatory requirements drive the need for more robust data quality.

Hence, it initiated the stock with a BUY rating and a target price of RM1.40.

The Group's Managing Director, Dr. Raymond Kwong, continues to see IT related business opportunities in the Asian financial sector.

The company just announced earnings for Q3 FY14:

Revenue: +25% to RM136 mln
Profit: +33% to RM62.9 mln
Cash flow from operations: RM76.6 mln vs RM38.6 mln
Dividend: 1 cents per share vs 0.8 cents per share
Order book: RM250 mln

Revenue was higher due to contribution from software licensing, maintenance and enhancement services and sale of software and hardware products.

It was also due to a new source of revenue from the insurance processing business that it acquired from the Merimen Group in Q4 2013.

However, revenue was partially offset by a decrease in contribution from software project services that fell by 61% to RM11.2 mln, as new contracts didn’t come in as quickly as existing ones were being completed.

The sale of software and hardware products grew significantly by 785% to RM23.4 mln as it benefited from two large sale of hardware products.

It witnessed a similar kind of jump in revenue from this segment in FY12.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question
Question

1. Can it propel its growth with current order backlog?

According to DBS Vickers Research, the group needs to secure RM150 mln worth of new orders to meet analysts’ FY15 profit growth target of 15%.

This, combined with the existing RM250 mln order backlog, will imply RM400 mln of revenue, excluding maintenance income.

A big order win worth RM200 mln from RHB bank could be beneficial but there has not been much visibility on the award of the contract so far.

Question
Question

2. How much revenue does it expect from OCBC's acquisition of Wing Hang Bank?

Banks need to integrate their IT systems after mergers and acquisitions.

Post-merger integration projects for Hong Leong-EON Bank which merged in May 2011 and Thanachart-Siam City Bank which merged in October of the same year are a few examples.

Its existing client OCBC has recently satisfied all the pre-conditions to buy Hong Kong's Wing Hang Bank.

The deal is worth US$4.95 bln.

So, the chances are high that Silverlake may benefit from this acquisition.

Total number of questions in the full story: 8)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do.


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