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Silverlake Axis (SILV SP) Summary

Core Content

Silverlake Axis (SILV SP) is a Singapore-based technology company operating in the Asia-Pacific banking software market. The company is currently trading at SGD1.16 with a target price of SGD1.40, implying a 21% upside. Its market capitalization is USD2.1B, and average daily trading volume is USD2M. The investment thesis initiates a "BUY" rating, citing strong growth prospects and a solid capital structure.

Key Highlights

• Market Position: Silverlake Axis holds a strong position in the Asia-Pacific banking software market, ranked fifth in the region and top two in Southeast Asia. It serves 40% of leading Southeast Asian banks.
• Growth Drivers:
  • IT Spending Growth: The Asia-Pacific banking IT market is expected to grow at a 6.8% CAGR over the next five years, outpacing global growth.
  • Core Banking System Upgrades: Banks are upgrading aging systems, which is expected to drive sales of Silverlake's flagship product, Silverlake Axis Integrated Banking Solution (SIBS).
  • Recurring Revenue: Software licencing and maintenance services form a significant portion of recurring revenue, with 43% of group revenue from licencing in FY6/14.
• Financial Performance:
  • EPS Growth: Projected 16% CAGR in FY6/14E-17E EPS.
  • FCF Growth: Expected 11% CAGR in FY6/14E-17E free cash flow.
  • Dividend Yield: Net dividend yield is expected to rise from 3.4% to 5.4% over the forecast period.
• Capital Structure: The company has a net cash position of MYR300m, providing flexibility for capital management through dividends or buybacks.
• Valuation: The DCF-based target price of SGD1.40 implies a 21% upside from the current price. The implied FY6/15E P/E is 26.6x, which is in line with its peer Temenos but offers a more attractive dividend yield.

Main Points

• Investment Thesis: The company is initiated at "BUY" with a target price of SGD1.40, based on a DCF model with a WACC of 9.3% and terminal growth of 3.0%.
• Growth Expectations:
  • The 16% CAGR in EPS is supported by the scalable nature of the business and the growing demand for IT upgrades.
  • The recurring income stream, driven by software licencing and maintenance services, is expected to continue growing, providing a stable and predictable revenue base.
• Market Trends:
  • The Asia-Pacific banking market is projected to grow significantly, with IT spending expected to reach over USD430B in 2014.
  • Banks are increasingly adopting third-party solutions, which presents a huge addressable market for companies like Silverlake Axis.
• Key Risks:
  • Potential departure of key personnel.
  • Loss of customers.
  • Reduction in IT spending by banks.
  • Removal of tax incentives.

Key Data

Share Price Performance

• 52-week high/low (SGD): 1.15 / 0.71
• 3-month average turnover (USDm): 2.0
• Free float (%): 28.8
• Issued shares (m): 2,244
• Market Capitalization (SGD): 2.6B
• Major Shareholder: GOH PENG OOI (67.6%)

Investment Catalysts

• Acquisitions by existing customers
• New customer acquisition

Peer Comparison

Conclusion

Silverlake Axis is positioned to benefit from the growing IT spending in the Asia-Pacific banking sector. The company's entrenched market position, recurring revenue streams, and strong cash generation capabilities support its "BUY" rating and the target price of SGD1.40. The DCF model suggests a 21% upside, and the company's financial metrics indicate a solid growth trajectory with increasing dividend yields and profitability.