KUALA LUMPUR: Having secured a leading position in Asean, with over 40% of leading Southeast Asian banks today using its software and services, Singapore-listed Silverlake Axis Ltd is now vying for the top position in the Asia-Pacific — and it is confident of achieving it.
Silverlake (fundamental: 3; valuation: 2.1) was founded by Malaysian Goh Peng Ooi and is a provider of digital economy solutions and services for its clients in the banking, insurance, payment, retail and logistics industries.
He said the group has been ahead of competitors in what he calls “the flow of time” wherein companies evolve from being technology-based to information-based, followed by capability and subsequently intelligence.
“Right from the start our end point is intelligence. We have worked on it for 27 years. We have a winning formula, I’m not surprised if the group quantum leaps again,” Goh, the group executive chairman of Silverlake, said in an exclusive interview.
Silverlake is a leading software provider to the banking sector in Malaysia, Singapore, Indonesia, Thailand, the Philippines and Vietnam.
In fact, he does not discount the group penetrating Europe and the United States at some point in the future.
Last December, Silverlake acquired Finzsoft Solutions Ltd, a software development company based in New Zealand and listed on the New Zealand Stock Exchange.
“There are strong synergies between Silverlake and Finzsoft’s products and solutions, and a natural alignment of target customers in the Asia-Pacific region being Tier-1 banks,” said Dr Raymond Kwong, Silverlake chief executive officer and group managing director.
Finzsoft had last year fully acquired Sush Mobile, which develops end-to-end mobile solutions, and specialising in applications for businesses primarily in the enterprise space.
Kwong does not discount any future acquisitions with good recurring income, which could add value to its customers’ digital economy businesses.
Note that Silverlake was in a net cash position of RM334.3 million as at Dec 31 last year, after deducting borrowings of RM3.16 million.
From 2010 to 2014, Silverlake made acquisitions to broaden its suite of software solutions and service offerings. During the same period, it registered a compound annual growth rate (CAGR) of close to 30% for its revenue and 40% for its net profit.
Over the medium to long term, Kwong said Silverlake’s earnings will grow at the “mid-teens” level — in line with revenue growth.
For the first half of financial year 2015 ended December 2014 (1HFY15), Silverlake registered slower revenue growth although profit rose at a faster pace and margins expanded. But this raised concerns among analysts of the lack of major sizeable order wins that may limit future earnings growth.
But the software giant is unperturbed, and is determined to continue its focus on its two main business segments — software licensing, and maintenance and enhancement services — which rake in higher margins.
“Silverlake’s business is based on quality recurring income. During 1HFY15, we had a better mix of higher margin revenues which resulted in higher profit growth over revenue. We will continue to focus on growing the higher quality earnings segments of our business,” Kwong said.
For 1HFY15, software licensing as well as maintenance and enhancement services were the only segments that reported an increase in revenue — of 26% and 21%, respectively. The former accounted for 30% of group revenue and the latter 51%.
Kwong said these segments are expected to continue to have a healthy level of growth, and offer margins double to triple those of project services.
“Over the medium to long term, we are well-positioned and target to grow our core revenue CAGR at the mid-teens level,” Kwong said.
He declined to comment on the prospects of other segments, such as software project services, sale of software and hardware products, credit and cards processing, and insurance processing — all of which saw a drop in revenue. These four segments accounted for 19% of group revenue in 1HFY15.
For 1HFY15, net profit grew 18% to RM131.3 million while revenue rose 6% to RM240.9 million. As a result, gross profit margin improved to 66% from 60%, while net profit margin rose to 58%, from 49%.
Silverlake saw a record year in FY14, as its revenue hit a high of RM500.7 million and net profit RM248.9 million.
CIMB Research has a “reduce” call on Silverlake with target price of S$0.99 (RM2.655).
“Silverlake continues to have a rich valuation in our view, trading at 27.6 times forward price-earnings ratio, above comparable peers’ average of 19.7 times,” said Phillip Capital, who also has a “reduce” call with a target price of S$1.16.
UOB Kay Hian in a Feb 13 note said Silverlake’s dividend payout ratio of 90% is expected to be sustainable, and dividend yields of 3.4% to 4.6% in FY15 to FY17 seem decent. It maintained a “buy” on the counter with a target price of S$1.66.
“Given the jumpy nature of orders, it would not be surprising to see marginal volatility in revenue year-on-year. However, beyond the short-term order book fluctuations, Silverlake’s backlog of orders and its stable business model would allow the group to steer through revenue volatility,” said analyst Bennett Lee.
Meanwhile, Maybank Kim Eng is of the view that Silverlake will benefit from the weakening ringgit, as it generates revenue largely in Singapore dollars and US dollars while costs are mainly denominated in ringgit. The research house maintained its “buy” call on the stock with a target price of S$1.40.
Silverlake closed at S$1.36 last Friday, giving it a market capitalisation of S$3.042 billion.
The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.comfor more details on a company’s financial dashboard.
This article first appeared in The Edge Financial Daily, on March 30, 2015.