Sunday, 16 September 2018

Review of Silverlake Axis

In recent times, Silverlake Axis's share price has fallen from its 50-60 cents range to that of 41.5 cents as of today. The question on people's mind is probably, if the current share price reflects the value of the company. As a start, let's recap on the business of Silverlake.

Brief description of Silverlake Axis

Silverlake Axis's main competency lies in the core banking system industry and insurance. It produces software which is used to run the operations of financial institution. As the core banking system is a critical system for the bank, there is a high risk and high cost nature involved if banks switch from one core banking system product to another. Hence, this is where Silverlake's business moat lies- It is difficult for its customers to switch out. 

Silverlake adopts a business model where it sells the software to financial institutions and then charges a recurring annual maintenance fee as a vendor. This model is similar to Sarine Technologies. 

Given its business model, Silverlake has been able to generate a consistent EPS and cash flow making it easy to estimate the value of the company because it is least affected by economic cycles.

Business Fundamentals

So let's now look at its Balance Sheet and cash flow. Its latest Financial results can be found here.

In the previous financial year, Silverlake had an abnormally high profit because it did a one time sale of its China stake. Otherwise, its earning per shares will be only 5 Malaysian cents (or about 1.6 SG cents). This means at at current prices, SIlverlake is priced at about 14x P/E.

On the cash flow front, the company is generating about 160 Million in Ringgit after accounting for investments into its software development. It means Sivlerlake is able to support about 6 Malaysian cents or 2 SG cents Dividends. Silverlake too still has about 300 Million Ringgit in cash. Most of the stated cash are in deposits in China because of China's restriction of capital movement; silver lake has to slowly transfer the cash out of china.


Given that Silverlake's business model is fairly consistent and resilient, we can estimate that shareholders will get 2 SG cents of dividends annually. This will be further supported by its strong cash reserves which it is trying to take out from China.

In my opinion, Silverlake can be valued as a dividend stock which will give shareholders an annual dividend of 2 SG cents. At a price of 41.5 cents, the company is at a 4.8% yield. In my opinion, Silverlake is fairly priced and investors may consider the company whenever its share price places it in the 5% yield.