Silverlake Axis - RHB Invest 2018-06-27: 2018H2 Small Mid Cap Top Pick #2 ~ Riding On Banks’ Spending Recovery

Silverlake Axis - RHB Invest 2018-06-27: 2018h2 Small-mid Cap Top Pick 2 ~ Riding On Banks’ Spending Recovery SILVERLAKE AXIS LTD SGX: 5CP

Silverlake Axis - 2018H2 Small-Mid Cap Top Pick 2 ~ Riding On Banks’ Spending Recovery

  • Maintain BUY and SGD0.65 Target Price, 23% upside.
  • Poor FY17-18 financial performances have been on regional banks cutting/pulling back on major IT spending over the last two years. However, we understand these banks are now open to large IT capex again, with some needing to upgrade core banking systems.
  • This trend is justified by Silverlake’s contract wins over the last few months and orderbook at near record highs. Hence, we think earnings will surge strongly over the next two years, especially in FY19.

Silverlake Axis announced it won several sizable contracts

  • Silverlake Axis announced it won several sizable contracts in the past few months, eg upgrading Malaysia Building Society’s (MBS MK, NR) core banking system. This has bumped up existing orderbook to MYR380m, near peak levels.
  • Management is in talks with a few Indonesian financial institutions that are looking to upgrade their core banking systems. 
  • We estimate each of these contracts to be worth ~MYR150-200m and implemented over a 2-year period. Thus, we expect these factors to translate into earnings visibility and potentially add on to 89.8% increase in net profits, especially in FY19 (Jun).

Recurring dividends back to attractive 5-6% levels plus special dividends.

  • FY17-18F dividends are supported by special dividends from share sales in Silverlake’s China-listed associate Global InfoTech (300465 CH, NR). 
  • With earnings affected, dividends from recurring NPAT have decreased significantly. However, with Silverlake’s projected recovery, we expect recurring dividends to improve to 5.7% in FY19. 
  • Additionally, proceeds from further sales of GIT shares are likely to translate into special dividends to shareholders – further increasing the dividend yield.
  • Share buybacks have also commenced, and 31.8m shares have been bought back, YTD.

The next Silverlake in the making?

  • Silverlake’s insurance business has been experiencing double-digit growth since inception, and management has expressed interest in acquisitions to hasten the growth pace.
  • As we see it, once insurance revenue reaches a more sizable base, a spin-off should be possible, This ought to benefit shareholders and – at the same time – provide the insurance business with ample resources to grow at a faster speed.

Maintain BUY.

  • With bumper years of PATMI growth ahead – justified by Silverlake’s strong orderbook of > MYR380m (not seen since FY15-16) – we believe the business cycle has bottomed – with earnings likely to surge over the next few years.
  • Positive signs from licensing and project services revenue streams in 3QFY18 also point towards a strong outlook. Our DCF-backed SGD0.65 Target Price reflects 21x FY19F P/E.
  • A key risk to our call is the delay in or implementation of orders.
  • RHB is the one of two brokers covering Silverlake.

Also Read:

Small Mid Caps Stocks Singapore - RHB Invest 2018-06-27: Top Picks For 2H18

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | 2018-06-27
SGX Stock Analyst Report BUY Maintain BUY 0.650 Same 0.650