Silverlake Axis

Silverlake Axis: 2QFY15 profit of RM71.6m (+18.3% y/y) and 1HFY15 profit of RM131.3m (+17.6%) are in line with our expectations. Second interim dividend is raised to SG 1.1¢ (from 0.9¢ in 2QFY14).

2QFY15 revenue was 0.9% lower y/y (RM124.1m) but gross profit gained 6.5% to RM82.4m as gross profitability improved 4.5pp to 66.4%. Revenue contribution snipped across all businesses except most important maintenance and enhancement services (MES, ~51% revenue, +21.0% y/y), which generates long-term recurring income and enjoys the highest margins.

We like that Silverlake is highly capable of translating one-off software projects, which includes software licensing (RM71.9m, +25.9%) and software project services (RM27.2m, -35.7%), into recurring MES contracts at the end of the project.

However, the spike in MES revenue in 2QFY15 is also partly the result of Malaysia’s new-GST related enhancement contracts.

Revenue from other businesses, sale of software and hardware projects (RM0.8m, -77.5%), credit and cards processing (RM3.5m, -11.4%) and insurance processing (RM4.9m, -1.4%), are mostly down.

Other income, mainly contributed by MYR’s depreciation against SGD and USD, increased multiple-fold to RM4.9m. Weaker MYR is favourable to Silverlake, which prices contracts mostly in SGD and USD but incurs costs mainly in MYR.

Admittedly Silverlake’s 2Q results are merely in line and almost unexciting, but earnings prospects are bright on two accounts. Firstly, the cancellation of the CIMB-RHB-MBSB merger in Malaysia means the resumption of RHB’s planned upgrade for its core banking system. Secondly, the recent acquisition of FInzsoft paves the way for Silverlake’s expansion beyond ASEAN into Australia and New Zealand.

Maybank-KE reaffirms Buy call on Silverlake with DCF-based TP of $1.40. The street is divided with 2 Buys and 2 Sells.