KUALA LUMPUR, July 14 — 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 per cent over the next five years, outpacing global growth of 5 per cent.

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

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 per cent to RM11.2 million, 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 per cent to RM23.4 million as it benefited from two large sale of hardware products.

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

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

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

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

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

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 billion (RM15.8 billion).

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

3.     Why is it so confident of winning a contract from RHB?

In fact, CIMB Research says management is confident of clinching a contract from RHB.

Silverlake is not new to RHB, having recently completed projects for the bank in Laos.

4.     Is it certain that tax incentives would be extended upon expiry?

The Group enjoys a relatively low tax rate of 8 per cent as it benefits from various tax incentive schemes in Malaysia and Thailand.

Tax exemptions in Malaysia typically run for five years, but have historically been extended upon expiry.

Privileged status for its unit in Thailand will expire at end of 2017.

Maybank Research expects non-renewal of these schemes to have a material impact to its profitability.

However, it thinks this risk is low as history suggests that these tax incentives are typically extended upon expiry.

5.     Will it benefit from senior management attrition at Infosys?

There have been several departures of senior members at Indian IT giant Infosys in the past year.

This has led to clients switching to its rivals.

So customers such as DBS Bank, which uses Infosys’ core banking software Finacle, could turn to Silverlake Axis, says Maybank.

OCBC and UOB are already customers.

Or perhaps it may start looking at India for new opportunities.

6.     Does it foresee any risk from its clients being acquired?

While mergers and acquisitions provide opportunities, they can also be a threat.

It could win integration work when existing clients make acquisitions, but it could also lose clients when they are acquired as they migrate to a competing platform.

7.     Will it declare a special dividend?

The Group has a cash balance of RM337.7 million.

Maybank Research thinks the group could pay out a special dividend or buy back shares.

8.     Is it looking at more acquisitions?

Over the past three years it acquired Isis International in 2011, Merimen Group and Cyber Village in 2013.

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. — Investor Central

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