• Maintain BUY and SGD0.65 Target Price, 25% upside.
• Silverlake Axis’ poor FY17-18 financial performances have been on regional banks cutting/pulling back on major IT spending over the last two years. However, we understand these banks are now open to large IT capex again, with some needing to upgrade core banking systems. This trend is justified by Silverlake’s contract wins over the last few months and orderbook at near record highs. Hence, we think earnings will surge strongly over the next two years, especially in FY19, and maintain our call on this counter.

Winning of Several Sizable Contracts

Silverlake Axis has announced the winning of several sizable contracts in the past few months, eg upgrading Malaysia Building Society’s (MBS MK, NR) core banking system. This has bumped up the existing orderbook to MYR380m, near its peak levels. Management also said it is in talks with a few Indonesian financial institutions that are looking to upgrade their core banking systems. 

We estimate each of these contracts to be worth ~MYR150-200m and implemented over a 2-year period. Thus, we expect these factors to translate into earnings visibility and potentially add on to its 89.8% surge in net profits, especially in FY19 (Jun).

Recurring Dividends Back to Attractive 5-6% Levels Plus Special Dividends

FY17-18 dividends were majorly supported by special dividends from share sales in Silverlake’s China-listed associate Global InfoTech (GIT).

With earnings having taken a hit, dividends from recurring NPAT have decreased significantly. However, with Silverlake’s projected recovery going forward, we expect recurring dividends to recover to 5.7% in FY19. Additionally, proceeds from further sales of GIT shares are likely to translate into special dividends to shareholders – further increasing the dividend yield.

Share buy-backs have also commenced, and 31.8m shares have been bought back YTD.

The Next Silverlake in the Making?

Silverlake’s insurance business has been experiencing double-digit growth since inception, and management has expressed interest in doing acquisitions to hasten the growth pace.

As we see it, once its insurance revenue reaches a more sizable base, a spin-off should be possible. This ought to benefit shareholders and – at the same time – provide the insurance business with ample resources to grow at a faster speed.

Maintain BUY and Target Price of SGD0.65, 25% Upside

With bumper years of PATMI growth ahead – justified by Silverlake’s strong orderbook of > MYR380m (not seen since FY15-16) – we believe the company’s business cycle has bottomed – with earnings likely to surge over the next few years. In addition, positive signs from Silverlake’s licensing and project services revenue streams in 3QFY18 also point towards a strong outlook.

Our unchanged DCF-backed Target Price reflects 21x FY19F P/E.

A key risk to our call is the delay in or implementation of orders.

Source: RHB Invest Research - 20 Jun 2018