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Silverlake Axis Ltd - Why stay in the low margin businesses?

Kiran Rameshchandra
Investor Central

21/5/2013 - Brokers have turned more optimistic on Silverlake Axis, after its Q3 FY13 results and a recent acquisition.

Hence, DMG OSK Research reiterated its BUY call with a higher target price of S$0.82, and CIMB Research maintained its OUTPERFOM call with a higher target price of S$0.81.

Silverlake Axis sells technology solutions to banks and financial services institutions in Asia.

It is benefitting from a relatively healthy pace of growth in Asia, compared to the Unites States and Europe.

It will continue to work on its current order book of software implementation contracts for the rest of FY13 and the whole of FY14.

In addition, substantial recurrent income from maintenance and enhancement services is expected to continue growing in FY13 and FY14 with the completion of new software projects and enhancement contracts in the order book.

The company's earnings for Q3 FY13 looked like this:

Revenue: +8% to RM108.7 mln
Gross profit: +20% to RM68.4 mln
Profit (Loss) from associates: (RM1.4 mln) vs (RM1.9 mln)
Profit: +8% to RM47.4 mln
Cash flow from operations: RM38.6 mln vs RM11.7 mln
Dividend: 0.8 S cents vs 0.5 S cents

Silverlake Axis' revenue rose mainly due to a 159.3% jump in revenue from licensing software to four different customers for RM36.2 mln.

But this was partially offset by a 31.3% decrease in revenue from software project services to RM28.7 mln, because current projects have been completed and implementation had just started on new projects.

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

1. Is there a need to stay in the low margin businesses?

Silverlake Axis' gross margin continues to drive its profitability.

It jumped to 63% in Q3 from 57% a year ago and 61% a quarter earlier, because it can earn higher margins on software licensing and maintenance and enhancement services.

Therefore, it makes us wonder about its need to stay in low margin businesses like credit card processing.

2. Which Malaysian Islamic bank project is it hoping to win?

DBS Vickers Research says the group is bidding for a core banking project of a major Malaysian bank, which could lead to upside for FY14 earnings.

On similar lines, OSK DMG Research believes the group is getting close to inking an important deal with a regional Islamic bank in Malaysia.

This also leads to our next question:

3. What is the expected contract size of this deal?

4. Have the additional project managers it hired this year made a difference to service quality?

According to OSK DMG Research, the group hired 30 additional senior project managers this year.

The total number of managers is 100.

The idea of hiring additional managers is to strengthen its project implementation capacity across the region.

5. Which type of contracts did it win in Q2?

Following the three software implementation contracts and one contract expansion secured in Q2 FY13, the group secured another two new contracts in Q3 FY13.

But it did not mention from whom it won the contracts.

6. What synergies will it derive from the acquisition of Merimen?

Silverlake Axis completed the acquisition of an 80% stake in Malaysian IT company, Merimen Group for RM52.4 mln.

The remaining 20% comes with a call and put option at an exercise price of up to RM19.2 mln.

Merimen provides cloud computing platforms for insurance companies and has a leading position in Singapore, Malaysia and a growing presence in Indonesia and the Philippines.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

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