Improving outlook
- 2Q22 results above expectations; strongest quarterly revenue recorded on higher project revenue
- Continued growth in total recurring revenue; strong gross margin
- Improving outlook with healthy deal pipeline; secured revenue backlog of c.80% for FY22
- Revised up FY22F/23F earnings by 9%/8%; maintain BUY with S$0.39 TP
Investment Thesis:
Project-related revenue growing on improving outlook. License and project revenues, which have been challenging over the last two years, have exhibited a strong recovery, as evidenced from the 1H22 results. The banking business continues to be the key contributor. With the rising interest rate environment, which is beneficial to banks, coupled with the gradual recovery of the global economy, we can expect more contract wins going forward. MOBIUS, the new open banking platform, could be a gamechanger and is expected to see a higher adoption rate, while the existing core banking system remains the key contributor currently, due to the stability of the system.
Continued growth in recurring revenue with impressive margin. We like Silverlake for its high recurring revenue contribution of at least 60% of the total, and impressive gross margin of c.60%. In 1H22, recurring revenue formed 75% of total revenue while gross margin came in at 60.4%.
Valuation:
Maintain BUY with a slightly higher TP of S$0.39, pegged to the four-year average PE of 18x (previously 19x). Global peers are trading at average forward PE multiples of 24x and 21x over the next two years.
Where we differ:
More optimistic – expect recurring income to expand further. We remain optimistic on Silverlake’s business given its market leader position in the core banking solutions segment. Digitalisation has now become a necessity instead of something good to have.
Key Risks to Our View:
1) Slowdown in IT spending on the back of the weak global economy could lead to a lower orderbook and 2) concerns on corporate governance issues. Related party transactions with Mr. Goh’s private companies over the past few years have raised concerns on corporate governance.