Silverlake Axis - RHB Invest 2019-08-01: A Positive 4QFY19 Ahead; Keep BUY


Silverlake Axis - A Positive 4QFY19 Ahead; Keep BUY

  • BUY this sector and country Top Pick, DCF-based SGD0.65 Target Price, 25% upside plus 5.7% FY19F (Jun) yield.
  • With robust fundamentals and earnings growth, SILVERLAKE AXIS (SGX:5CP) should record a robust FY19.
  • Sturdy earnings and margin growth should continue into 4QFY19, as it is still executing the major Malaysian core banking contract. It also won two financial services digital platform contracts in Malaysia, and four upgrade, implementation and maintenance jobs from core banking and card customers – which will bolster FY19-20F earnings.

A positive 4QFY19 ahead.

  • In 3QFY19, Silverlake Axis's revenue and PATMI increased 12% and 77% y-o-y, mainly on margins expanding from licensing revenue growth (+98% y-o-y) as it continued to implement the Malaysian contract. We expect this expansion to continue into 4QFY19. As such, Silverlake Axis should book a positive 4QFY19F, on continued margin and positive PATMI growth.
  • In addition, phases of the new contracts won will also be implemented in 4QFY19F, further contributing positively to its performance ahead.

Potential large orders from Indonesia and Thailand to be a catalyst.

  • As of end-3QFY19, Silverlake Axis's orderbook stood at MYR250m, down from MYR280m in 2QFY18. 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 Axis is also confident of securing additional large-sized contracts by the end of 2019, especially from these countries – which should further contribute towards PATMI growth in FY20-21. This will likely be the next impactful catalyst for this stock.

Higher dividend payout ratio can be expected in 4Q19.

  • Management said it is keen on rewarding shareholders with better dividends. In addition, we believe Silverlake Axis will likely engage in more share buybacks, similar to what was done in 2018 – which is a positive.
  • As of 3QFY19, it declared a total of SGD0.004 in DPS, vs SGD0.003 a year ago. For 4QFY19, management guided that it will likely look to increase the payout ratio further.
  • Historically, Silverlake Axis has paid over 80% of earnings as dividends. See Silverlake Axis dividend history. Due to previous share buybacks, we expect its dividend payout ratio for 2HFY19 to be 60-70%, resulting in a projected FY19F yield of 5.7%.
  • Key downside risks to our call are an economic recession, and banks capex budgets.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2019-08-01
SGX Stock Analyst Report BUY MAINTAIN BUY 0.650 SAME 0.650