Pursuing a robust deal pipeline
- 2QFY6/24 net profit was below our estimate due to weaker GPM qoq.
- Management remains optimistic of exceeding its c.RM800m revenue target in FY24F, fuelled by continued order win momentum and RM1.4bn pipeline.
- Reiterate Add with a lower TP of S$0.36 as we factor in lower GPM with Mobius gaining traction. Elevated US Fed rates are a re-rating catalyst.
2QFY6/24 missed our expectations as product mix evolves
Silverlake Axis (SILV) posted 2QFY6/24 core net profit of RM40.4m (-17% qoq, -4% yoy), 9%/10% below our/Bloomberg consensus estimates. 1HFY6/24 core net profit formed 47%/49% of our/Bloomberg consensus FY24 forecasts. While 2QFY24 revenue was in line with our expectation, this comprised a larger proportion of lower-margin maintenance and enhancement service revenues (as revenue from higher-margin licencing fees from previous project wins tapers off), which resulted in a weaker 54% GPM (vs. 57% in 1QFY24), missing our forecast of 58%.
Robust RM1.4bn deal pipeline but GPM may trend lower
SILV recorded c.RM114m worth of contract wins in 2QFY24; this brings its total contract wins to c.RM239m in 1HFY24 (FY23: RM635m). SILV’s deal pipeline remained robust at c.RM1.4bn at end-Dec 2023 and the company said c.RM153m of this total had a high probability of closure in the coming quarters. Given its current deal closure momentum, management remains fairly certain of revenues surpassing its c.RM800m target for FY24F (FY23: RM765m). That said, we think its overall GPM may start trending towards a new lower run rate (around the level of c.54% in 2QFY24 vs. c.59% in FY23) as contract wins for its cloud-based core banking system (CBS) offering Mobius (revenue recognition of its cloud-based Mobius contracts is more spread out over the lifetime of the contract) start outpacing those of its traditional CBS Silverlake Axis Integrated Banking Solution (SIBS).
Optimistic of improving sentiment post regional elections
According to SILV, sales of its non-banking products (insurance, retail, e-identity solutions) are gaining ground in their respective geographies although these account for only a quarter of total revenues in 2QFY24. On its banking products (Mobius, SIBS), SILV is optimistic that a more stable business sentiment (as Thailand and Indonesia stabilise post their general elections; management sees general elections as a key destabliser) will improve the investment appetite of its customers. We also believe higher-for-longer interest rates should keep technology upgrades appealing for banks.
Reiterate Add with lower TP of S$0.36
We cut our FY24-26F EPS estimates by c.3-5% as we reduce our assumptions on SILV’s GPM. Maintain Add as we believe its earnings growth in FY24-26F will still be fuelled by banks upgrading their core banking systems. Our TP remains pegged to 14x CY24F P/E, 1 s.d. below its 10-year mean to reflect continued unexpected one-off charges. Downside risks include drastic US Fed rate cuts, which may affect banks’ investment sentiment.