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.
- With improving fundamentals and stronger earnings growth as at 2Q20, Silverlake Axis is on track for a decent FY20. That said, PATMI will be likely negatively impacted by higher effective tax rates and costs – on top of a potential cut in banks’ capex spending.
- Large contract wins from Indonesia and Thailand will likely be the next earnings and share price rerating catalysts. Until then, we remain NEUTRAL on the stock, on the anticipation of weaker earnings ahead.
- We also cut FY21-22F PATMI by 14% for each year, resulting in a lower DCF-backed Target Price of SGD0.26.
- See Silverlake Axis Share Price; Silverlake Axis Target Price; Silverlake Axis Analyst Reports; Silverlake Axis Dividend History; Silverlake Axis Announcements; Silverlake Axis Latest News.
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
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https://www.rhbinvest.com.sg/
2020-04-28
SGX Stock
Analyst Report
0.26
DOWN
0.460
