Can This Growth Company Continue its Winning Run?

Silverlake Axis Ltd (SGX: 5CP) has been an outperformer over the last five years. The company recorded capital returns of about 681% from 1 July 2009 to its closing price on 19 November 2014. By comparison, the capital gain returns of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), was 41% for the same duration. During the same timeframe, the company also distributed a total of about 12 cents per share in dividends.

While Silverlake Axis has been banking in the returns — as Foolish investors, we should look behind the curtains to understand how the company can continue to grow its sales.

A closer look

Silverlake Axis is a software solutions provider primarily for the banking and financial services sector, and other industries. The company has six major business segments, as listed below:

  1. Software Licensing: licensing revenue from its Silverlake Axis Banking Solution (SIBS)
  2. Software Project: project implementation services to deliver end-to-end solutions to the customer
  3. Maintenance and Enhancement Services: software maintenance services which ensure smooth running of customer’s daily operations
  4. Sale of Software and Hardware Products: bundled third party hardware or system software with SIBS or other software services that the company offers
  5. Credit and Cards Processing: Silverlake Japan’s outsourcing service to banks for processing of credit and cards
  6. Insurance Processing: Silverlake Axis’ Merimen Venture subsidiary which provides a Software as a Service (Saas) platform for the insurance sector.

Next, we look at the growth of the different business segments in the graph below.

 Can This Growth Company Continue its Run? - 1

Source: Company Earnings Report

In the five financial years, the topline for Silverlake Axis has grown from around MYR 176 million to MYR 500 million. From the graph above, we can also see that majority of the revenue comes from its Software Licensing segment and its Maintenance and Enhancement Services segment. For the financial year ended 30 June 2014 (FY2014), the two business segments — which are focused on the banking and financial services sector — collectively made up about 72% of total sales for the company. On another note, it is important to keep track of the growth of the Maintenance and Enhancement Services segment as it represents recurring revenue for Silverlake Axis.

In contrast, the Software Project Services segment, and the Software and Hardware products segment are project-based work and non-recurring in nature. This makes the sales for the two segments less certain from year to year.

The newest business segment is the Insurance Processing segment. This business is made out of Silverlake Axis’s 80% stake in its subsidiary, Merimen Venture. Currently, its sales contribution is still small in the overall scheme of things.

 Can This Growth Company Continue its Run? - 2

Source: Company Earnings Report

Looking at Silverlake Axis’ sales from a geographical perspective, it quickly becomes obvious that majority of its revenue comes from South East Asia. In FY2014, the South-East Asia region alone made up a hefty 87% of total sales. Most of the revenue growth also emanated from the region.

Foolish take away

The exercise above is to look at the sales growth alone. Moving forward, we should also observe if the topline growth trickles down to the bottom-line. But, that’s for another article.

At the current state, Silverlake Axis is still very much dependent on the banking sector and the South-East Asian region to grow its revenue. According to the company, 40% of leading South-East Asian banks use its SIBS system to process transactions daily. Further revenue growth may come from its ability to drive SIBS adoption, and from bolt-on acquisitions of additional complementary services. With additional services, Silverlake Axis may have the opportunity to cross-sell across its existing network of South-East Asian banks. Finally, we also want to keep an eye into its forays into other non-banking industries which may enlarge its addressable market.

As of the closing price on 19th November 2014 of $1.25, Silverlake Axis traded at a trailing earnings ratio of about 29, and has a dividend yield of around 3.1%.

You can read the second part of the analysis of Silverlake Axis right here. To keep up to date on the latest financial and stock news, sign up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.