Silverlake Axis - RHB Invest 2019-02-15: Strong Quarter, Expecting Better Growth Ahead

SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Strong Quarter, Expecting Better Growth Ahead

SILVERLAKE AXIS LTD (SGX:5CP) remains one of our Top Picks for 2019.
As previously guided in our 31 Jan 2019 report (see Silverlake Axis - RHB Invest 2019-01-31: Overhang Cleared, Positive 2Q19 Ahead; BUY), Silverlake reported strong 2Q19 results, with revenue rising 28% y-o-y and PATMI surging 84% y-o-y. This was mainly due to improvement of margins from more licensing revenue, which grew 98% y-o-y as it continued to implement the large sized Malaysian contract. In addition, project services continued to grow by 26% y-o-y.

On 29 Jan, a block of > 39m shares were crossed. Via our channel checks, we understand this block was potentially from a former substantial shareholder who – over the past months – has been selling it in the open market. This has partially caused Silverlake Axis' share price to be muted and depressed.
With this overhang gone, we are optimistic that Silverlake Axis' share price will start to re-rate, reflecting Silverlake Axis’ true value.

Management said it is keen on rewarding shareholders with better dividends. We believe Silverlake will likely conduct more share buybacks, similar to 2018 – this should be positive for the company.
As at 2QFY19, it has declared a total of SGD0.007, which represents roughly 50% of its 1HFY19 PATMI. For 2HFY19, management guided that they would likely look to increase the payout ratio.
Historically, Silverlake has paid > 80% of their earnings. Due to the company’s share buybacks previously, we expect the payout ratio for 2HFY19 to be 60-70%, resulting in a projected FY19 yield of 4.6%

As at end-2QFY19, orderbook stood at MYR280, down from MYR325m. With banks budgeting for more IT investments, especially in Indonesia and Thailand, we understand management is actively in talks with a few potential new and existing customers.
Silverlake is also confident in securing additional large-sized contracts by end-2019 – this should further contribute towards its PATMI growth in FY20F-21F.

With the improving fundamentals and strong earnings growth as of 1HFY19, Silverlake is on track for a healthy 2019.
We expect the strong earnings growth and margin improvement to continue into 3Q19F and 4Q19F as it continues to execute the large size Malaysian contract.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-02-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.650 SAME 0.650