Silverlake Axis

1 June 20, 2014 Initiation COMPANY RESEARCH | SEE PAGE 24 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012 Silverlake Axis (SILV SP) Monetizing the banks Initiate at BUY with a DCF-based TP of At our TP, the implied FY6/15E P/E is Entrenched position in growing market with solid expansion in recurring income stream. Strong capital management potential with a net cash position of MYR300m. Initiate at BUY with TP of Our DCF-based (WACC= , terminal g= ) TP of implies a 21% upside.

2 Despite the strong 32% share price performance YTD, we expect the solid 16% FY6/14E-17E EPS CAGR to sustain its re-rating. Furthermore, the highly cash generative nature of its business should support rising dividends. Reasons to be optimistic Entrenched position in the huge addressable Asia-Pacific banking market. Ranked fifth in Asia Pacific and top 2 in Southeast Asia, we expect SAL to benefit from growing IT spending by banks (five-year CAGR= ). The ongoing drive to upgrade ageing core banking systems will continue to drive sales of its flagship product and allow it to monetize the large installed base of its products.

3 Strong momentum in software licencing: leading indicator for recurring income. Software licencing sales increased by 15% YoY in 9 MFY6/14 and we expect this to translate into growing recurring income (FY6/14E: 43% of group revenue) over the next few years. Strong capital management potential. With an ungeared balance sheet and sizeable war chest of more than MYR300m in cash, SAL could optimize their capital structure by announcing a special dividend or initiating a share buyback program.

4 Catalysts: Acquisitions by existing customers, new customers. Risks: Key personnel departure, loss of customers, curb in IT spending by banks and removal of tax incentives. Key Data Share Price Performance Maybank vs Market - (LHS, SGD) Silverlake / Straits Times Index - (RHS, %)1 Mth3 Mth12 MthAbsolute(%) to index (%) Recs400 MaybankConsensus% +/-Target Price (SGD) '15 PATMI (MYRm) '16 PATMI (MYRm) : FactSet; MaybankFYE Jun (MYR m) net EPS (sen) EPS growth (%) DPS (sen) P/E (x) (x) dividend yield (%) (%) (%) (x) debt/equity (%)net cashnet cashnet cashnet cashnet cash Derrick Heng(65) 6432 Share Price: MCap (USD): Singapore Target Price: (+21%) ADTV (USD): 2M Technology (New) BUY 52w high/low (SGD) 3m avg turnover (USDm) Free float (%) Issued shares (m) Market capitalization Major shareholders.

5 -GOH PENG OOI 2,244 FY14E June 20, 2014 2 Silverlake Axis Our thesis in charts Figure 1: Robust growth in IT spending for the Asia-Pacific banking market projected over the next five years Source: IDC Financial Insights Figure 2: With 40% of leading Southeast Asian banks as customers, SAL will benefit from this positive development Source: Maybank KE estimates Figure 3: Scalable nature of its business implies that the growing revenue base will quickly be converted to FCF Source: Maybank KE estimates Figure 4: Strong sales momentum in software licencing: leading indicator for recurring income Source: Maybank KE estimates Figure 5: DPS to rise on strong cash generation FY6/14E-17E FCF CAGR of 11% Source: Maybank KE estimates Figure 6: Solid earnings delivery to sustain the re-rating FY6/14E-17E EPS CAGR of 16% Source.

6 Maybank KE estimates 0246810 GlobalAsia PacificEuropeROWN orthAmericaIT Spending by banking sector - five-year CAGR(%) 0100200300400500600700800FY09FY10FY11FY1 2FY13FY14 EFY15 EFY16 EFY17 EGroup revenueMaintenance revenue(MYR m) 0100200300400500600700800FY09FY10FY11FY1 2FY13FY14 EFY15 EFY16 EFY17 EGroup revenueFCF(MYR m) 0510152025303540451 QFY112 QFY113 QFY114 QFY111 QFY122 QFY123 QFY124 QFY121 QFY132 QFY133 QFY134 QFY131 QFY142 QFY143 QFY14 Software licencing sales(MYR m) (RHS)FCF (LHS)(MYR m) (SGD) TP (SGD) 25x 15x 20x 10x June 20, 2014 3 Silverlake Axis Investment thesis Initiate at BUY with TP of Our DCF-based (WACC= , terminal g= ) TP of implies a 21% upside.

7 Despite the strong 32% share price performance YTD, we expect the solid 16% FY6/14E-17E EPS CAGR to sustain its re-rating. Furthermore, the highly cash generative nature of its business should support rising dividends. Reasons to be optimistic Entrenched position in growing market. According to IDC Financial Insights, IT spending for the Asia-Pacific banking market is expected to expand at a robust annual rate of over the next five years, outpacing global growth of With its entrenched market position in the Asia-Pacific banking market, SAL will benefit from this positive development.

8 Inntron, an IT consultant for banking software solutions, ranks it fifth in the region. Within this region, the company boasts a strong presence in Southeast Asia where 40% of the leading banks are its customers and it holds the top two positions in the key banking markets of Malaysia, Singapore, Thailand and Indonesia. The ongoing drive to upgrade ageing core banking systems will continue to drive sales of its flagship product and allow it to monetize the large installed base of its products.

9 Key reasons to core banking system upgrade: 1) Evolution of banking business drives growing data volumes; 2) Heightened regulatory requirements drive the need for more robust data quality; and 3) Banks are moving from being product centric to customer centric. Strong momentum in software licencing: leading indicator for recurring income. Sales momentum for software licencing remains strong which should translate into sustained growth in recurring income over the next few years. Our projected 13% pa organic revenue growth from FY6/14E to FY6/17E will be secured by this growing stream of recurring income (FY6/14E: 43% of group revenue).

10 Strong capital management potential. With a sizeable net cash position of MYR300m, capital management potential is strong. SAL could optimize its capital structure via a special dividend or a share buyback program. The latter is a move recently announced by its closest peer, Temenos. June 20, 2014 4 Silverlake Axis Growing IT spending for the Asia-Pacific banking market IDC Financial Insights expects IT spending by global financial services firms to be more than USD430b in 2014.