Excerpts from KGI report

Analysts: Kenny Tan & Joel Ng

Lake shrinked but new ponds are forming
• We initiate with an OUTPERFORM on Silverlake with a TP 
of S$0.30 based on 13x FY21F EPS.

• Silverlake has strong, multi-year relationships with key Asian banks and other financial institutions, providing and servicing their core banking systems.

Silverlake

Share price:
25 c

Target: 
30 c

Despite COVID-19 leading to lower project revenue, recurring maintenance revenue has picked up the slack, leading to minimal sales fall-off.

• Two main future growth opportunities are from the expansion of the insurance Software-as-a-Service (SaaS) business, as well as potential projects involving digital banking in Malaysia.

• War chest of cash is helpful in the event Silverlake wishes to pursue acquisitions or build up additional internal capabilities, which it will need if it wishes to compete in the cloud space.


Investment thesis:
While COVID-19 has led to the delay of new projects, banking clients have stepped up requests for more maintenance works in this trying period. This has helped cushion Silverlake’s sales drop.

"There has also been little to no cancellation in orders, with management expecting a large contract to be signed in early FY21F."

-- KGI report

Meanwhile, the proliferation of the SaaS business will soon serve as yet another stable, recurring revenue stream for Silverlake. The business is now in the early stages of expansion into Japan.

gohpengooi 11.17MD and controlling shareholder Goh Peng Ooi.Silverlake can also see decent order book gains, 
should they manage to successfully partner with hopeful digital banking licensees.

While corporate purses for IT spending will be tightened in a post-COVID world, we expect a shift to cloud spending, where Silverlake has also pivoted towards with their latest business strategies.

Silverlake currently maintains a healthy balance 
sheet that can continue funding acquisitions to better compete in the cloud space.

Valuation & Action: We initiate with a TP of S$0.30, a 20% upside to Wednesday’s close price of S$0.25, based on 13x of FY21F estimated EPS.

A 13x peg is ~32% discount to Indian 
competitors, and 48% discount to European and American peers, and also below Silverlake’s average P/E in the past 5 years of trading.

We can expect further upside if highlighted 
catalysts occur, or when banks resume regular spending practices.

Our model assumes a 50% dividend payout ratio, which leads to future dividend yields between 4.2 – 5.0% based on the current price of S$0.25.

It is possible that Silverlake maintains 
current dividend of 1.8 Scts, a 7.2% dividend yield, since they have the cash for it, but we think that is an unlikely scenario.


Risks
: Margin pressure due to competition, lower-than-
expected new order wins, higher tax rates, continued wariness over interested party transactions, dividend cut or maintenance of unsustainable payout ratio.


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