September 5, 2019

Silverlake Axis, a sector Top Pick, saw revenue and PATMI rise 30% YoY and 86% YoY. This was due to margins improvement from higher licensing revenue, as it continued to implement the large sized Malaysian contract. This is further lifted by a MYR24.2m gain from fair value adjustments. However, we lower our FY20F-21F (Jun) PATMI on expected higher effective tax rate from its Malaysian subsidiaries.

Management said it is keen on rewarding shareholders with better dividends. We believe Silverlake will likely conduct more share buybacks, similar to 2019 – this should be positive for the company. As at 2HFY19, it declared a total of 1.1 SG cents. For FY20F, management guided that it will likely look to increase the payout ratio. Historically, the company has paid >80% of their earnings. Due to the share buybacks previously, we expect the payout ratio for FY20F to be 60-70%, resulting in FY20F yield of 6.5%.

As at end-FY19, orderbook stood at MYR300, up from MYR280m. 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 largesized contracts by end-2019 – this should further contribute towards its PATMI growth in FY20F-21F.

With the improving fundamentals and stronger earnings growth as at FY19, Silverlake is on track for a decent FY20 but PATMI will be likely impacted by higher effective tax rates. Large contract wins from Indonesia and Thailand should likely be the next catalysts for the stock. Maintain BUY with new DCF-backed TP of SGD0.56, from SGD0.65 23% upside plus c.7% yield. – RHB

Silverlake Axis closed at: S$0.44