SILVERLAKE AXIS: Banks' aggressive tech upgrades a catalyst

■   1QFY6/23 net profit of RM58m was 12%/4% above our/consensus estimates due to lower-than-expected taxes. 1Q GPM of c.59% was comparable yoy.

■  Business outlook is positive. Strong deal closure momentum in 1Q (RM136m) and deal pipeline remains robust (RM2.1bn).

■   Reiterate Add with higher TP of S$0.44. Banks are still aggressively looking to transform their tech capabilities – a key positive catalyst for SILV.   

1QFY6/23 beat our estimates due to hefty bilateral tax relief
SILV recorded net profit of RM57.6m in 1QFY6/23 (+20% qoq, +64% yoy). This was 12%/4% above our/consensus’ estimates. 1QFY6/23 formed 28%/26% of our/consensus’ full year estimates.

Silverlake founder and executive chairman Goh Peng OoiThe beat was largely due to lower-than-expected tax expense (c.14% tax rate vs. c.20% run-rate) as a result of the bilateral tax relief claimed (relating to a licensing deal booked in Indonesia) and utilisation of written-down allowance of intellectual property rights.

SILV’s 1QFY6/23 operating profit was in line with our forecasts as higher foreign currency exchange gains on its cash reserves (from the appreciation of foreign currencies against Ringgit Malaysia) offset its softer qoq revenue given timing mismatches between the completion of two Mobius contracts and the commencement of a new project secured in TH (-9% qoq, +23% yoy).

Total opex now runs at a higher new normal level to account for increased spend in business development and hiring talent.

Management remains positive on FY6/23 business outlook
Management remains positive on its FY6/23F business outlook. SILV closed RM136m of contract wins in 1QFY6/23 (FY6/22: RM508m, FY6/21: RM326m). Its deal pipeline stood at RM2.1bn at end-1Q, with c.RM282m worth of these deals in categories that have a high probability of closure.

In addition, SILV’s secured backlog stood at c.RM450m – a level management deems comfortable, and places it on track to achieve its c.RM800m revenue target for FY6/23F. While SILV’s GPM held steady at c.59% in 1QFY6/23 (FY6/22: c.57%), we understand that margins from SIBS currently trend above Mobius given the former’s strong demand and mature stage of the product. Having launched only two years ago, Mobius is still in the ramp-up stage and requires higher marketing costs.

Management generally strives for GPM of c.60% and NPM of c.25% (1QFY6/23: c.31%).

Reiterate Add with higher TP of S$0.44 Andrea Choong, analyst.Albeit smaller in size, other business lines such as insurance (c.7% of 1QFY6/23 revenue) are also showing good momentum. Revenue from vehicle claims processing activities are recovering as businesses reopen while Fermion, SILV’s insurtech offering, is growing at double-digit rates. We remain positive on SILV’s growth outlook, and raise FY23-25F EPS by c.3-5% as we incorporate a stronger deal momentum. A key risk in implementing these deals is hiring and retaining tech talent amid the ongoing inflationary environment. On the ground, recession risks are not of dire concern just yet as banks seek to upgrade their IT capabilities and offer new digital products.