Silverlake Axis - CGS-CIMB Research 2020-05-15: Lacking Near-Term Catalysts

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SILVERLAKE AXIS LTD (SGX:5CP)

Silverlake Axis - Lacking Near-Term Catalysts

• Silverlake Axis's 9MFY6/20 core net profit of RM126m (-17% y-o-y) was below expectations at 61%/66% of our/Bloomberg consensus FY20 forecasts.
• Lockdown measures will temporarily impact Silverlake Axis’s progress billing on project implementations. Cautious macro environment could also hurt order wins.
• Valuation appears attractive at current levels, but we believe more visibility on dividend payout is required to drive a sustained re-rating. Maintain HOLD.

Silverlake Axis's 3QFY20: Weak set of results

• Silverlake Axis (SGX:5CP)'s 3QFY6/20 core net profit of RM25.6m (-25.7% y-o-y) was below our expectations, mainly due to weaker-than-expected contribution from project-related revenue segments. 9MFY20 core net profit made up 61%/66% of our/Bloomberg consensus FY20 forecasts.
• Silverlake Axis's topline declined 1.6% y-o-y due to lower progress billing on project implementations; recurring revenue (80% of 3QFY20 revenue) expanded 12% y-o-y. 3QFY20 margins were compressed due to
  1. unfavourable revenue mix resulting in lower GPM, and
  2. higher effective tax rate due to loss of pioneer status by a Malaysian subsidiary.
• Silverlake Axis also announced that it will be switching from quarterly to semi-annual dividend payout.

Slower project wins due to cautious business environment

• Management noted that its business environment remains cautious, and clients are preferring to carry out incremental enhancements rather than committing to larger one-off projects. While the level of enquiries remains active, banks are hesitant to proceed with final decisions for new core banking system implementations.
• We estimate that Silverlake Axis’s orderbook recovered to c.RM320m as at end-Mar (end-Dec 2019: c.S$280m), as some banks are adjusting for loan moratorium policies rolled out by governments. With various lockdown measures in place globally, we see a further slowdown in Silverlake Axis’s project-related revenue in 4Q20F, and now expect topline to only grow 0.5% y-o-y in FY20F.

Conserving cash in anticipation of weaker earnings ahead

• Adjusting for slower progress billing for project implementation, and weaker order wins on the back of potential cut in banks’ capex spending, we cut our FY20-22F EPS forecasts by 14.9-18.6%.
• Due to the drop in anticipated earnings, management indicated that it would prefer to conserve cash. We lower our dividend payout ratio assumption to 45%, which implies 3.8-4.2% dividend yield for FY20-22F. See Silverlake Axis Dividend History.

Maintain HOLD with a lower Target Price of S$0.26

• Maintain HOLD with a lower Target Price of S$0.26, pegged to a lower CY21F P/E of 11.8x (still 1s.d. below Silverlake Axis’s 10-year historical average).
• See Silverlake Axis Share Price; Silverlake Axis Target Price; Silverlake Axis Analyst Reports; Silverlake Axis Dividend History; Silverlake Axis Announcements; Silverlake Axis Latest News.
• Silverlake Axis's valuation appears attractive post its c.30% correction over the past year, but we believe more visibility on dividend payout is required to drive a sustained re-rating.
• Upside risks include major core banking contract wins or cashing out on its stakes in Global Infotech.
• Deferred tech spending by banks in ASEAN is a key downside risk to our call.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-15

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.26 DOWN 0.380