Silverlake Axis - RHB Invest 2020-04-28: Spending Cuts Likely To Impact Outlook; NEUTRAL

SILVERLAKE AXIS LTD (SGX:5CP) | SGinvestors.io SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Spending Cuts Likely To Impact Outlook; NEUTRAL

  • NEUTRAL, new DCF-based Target Price of SGD0.26 from SGD0.41, 8% upside with c.3% FY20F (Jun) yield.
  • With the COVID-19 pandemic and plunging oil prices impacting economies, banks’ default rates are likely to increase – thereby dampening their profitability. This, together with lower interest rates, leads us to expect banks to cut IT capex spending. As such, we pare down Silverlake Axis (SGX:5CP)’s FY20-21F earnings by 14% for each year.



COVID-19’s major effect on the economy.

  • The COVID-19 pandemic has significantly impacted global economic growth, as well as financial markets worldwide. Globally, air travel has almost halted and many cities are on lockdown. As such, we believe banks will likely look at cutting costs, and increase provisions in anticipation of higher loan default rates.
  • As such, they are likely to hold back on major IT project spending, and could cut current IT capex budgets as well. We believe Silverlake Axis will also likely face greater headwinds in securing new projects from banks or financial intuitions.


Higher dividends only possible if large contracts come.

  • Management said it is keen on rewarding shareholders with better dividends. Historically, the company has paid > 80% of earnings as dividends. However, due to the drop in anticipated earnings, dividends are likely to decrease unless a large contract win comes along.
  • We expect Silverlake Axis’ FY20F dividend payout ratio at 40-50%, which would result in a yield of about 3%.


Outlook depends on large contract wins.



Risks.

  • Key risks downside risks to our call are a recession, cuts in banks’ IT capex spending. The opposite of these situations would present upside risks.





Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-28
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.26 DOWN 0.460



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