Not vested
Silverlake 3QFY2008 results
Previous Day Closing price: $0.325
Recommendation: Buy (maintained)
Target price: $0.56 (reduced from $1.00)
We are maintaining our BUY call on the stock. However, we are revising our target valuation down from 18x to 12x earnings instead, leading to a price target of S$0.56.
Earnings fell from high base, slower contract award
3Q08 earnings fell 37% YoY to RM20m. There were two primary contributing factors. One, 3Q07 was an exceptionally high base to compare against, and two, pipeline customers were slower in awarding projects than usual due to the slower economic climate.
Nine months’ profit however is up 25% YoY to RM97m, which is 21% above full year 2007 earnings. During 3Q08, Silverlake recognised only RM15m of SIBS licensing fees (two small contracts in Thailand and Philippines and one small upgrade contract).
Reducing forecasts on longer sales cycle
According to management, bank budgets are stable if not rising for mission-critical software such as core banking. However, customers are lengthening the sales cycle, and taking longer to assess options (eg upgrade or replace).
There is the possibility that a “large†upgrade contract by a regional bank, originally scheduled for 4Q08, may be delayed to 1Q09. We are taking a conservative view and adjusting our forecast accordingly. Therefore, we now expect full year earnings of RM121m, down from RM144m previously.
Exploring quarterly dividends, share buyback to support stock
Silverlake announced its first quarterly dividend of 0.5 Singapore cents a share, on top of the 1.5 cents in 1H08. In future, the company intends to pay quarterly dividends from its cash hoard of some RM80m now.
Assuming a payout ratio of 55%, FY08 yield is very attractive at almost 8% based on forecasted DPS of 2 cents a share. In addition, it intends to table a share buyback resolution for shareholders approval at the next AGM in July.
Pipeline healthy enough to support price hike
Also, Silverlake intends to propose a repricing of its software in S$ instead of US$, which will result in a 15% average price increase, inline with a general rise in banking software prices worldwide.
Management did not see this impacting its existing pipeline as existing competitive bids will still be at the old prices but future projects, perhaps from 2Q09 onward, should command higher prices.
Maintain BUY on lower target price