Maintain BUY and DCF-backed Target Price of SGD0.65, 26% Upside

• SILVERLAKE AXIS LTD (SGX:5CP) remains one of our Top Picks for 2019.
• As previously guided in our 31 Jan 2019 report (see Silverlake Axis - RHB Invest 2019-01-31: Overhang Cleared, Positive 2Q19 Ahead; BUY), Silverlake reported strong 2Q19 results, with revenue rising 28% y-o-y and PATMI surging 84% y-o-y. This was mainly due to improvement of margins from more licensing revenue, which grew 98% y-o-y as it continued to implement the large sized Malaysian contract. In addition, project services continued to grow by 26% y-o-y.

Roadblock for More Upside Cleared

• On 29 Jan, a block of > 39m shares were crossed. Via our channel checks, we understand this block was potentially from a former substantial shareholder who – over the past months – has been selling it in the open market. This has partially caused Silverlake Axis' share price to be muted and depressed.
• With this overhang gone, we are optimistic that Silverlake Axis' share price will start to re-rate, reflecting Silverlake Axis’ true value.

Higher Dividend Payout in 2HFY19 (Jun)

• Management said it is keen on rewarding shareholders with better dividends. We believe Silverlake will likely conduct more share buybacks, similar to 2018 – this should be positive for the company.
• As at 2QFY19, it has declared a total of SGD0.007, which represents roughly 50% of its 1HFY19 PATMI. For 2HFY19, management guided that they would likely look to increase the payout ratio.
• Historically, Silverlake has paid > 80% of their earnings. Due to the company’s share buybacks previously, we expect the payout ratio for 2HFY19 to be 60-70%, resulting in a projected FY19 yield of 4.6%

MYR280m Orderbook With Potential Large Size Contract Wins Pending

• As at end-2QFY19, orderbook stood at MYR280, down from MYR325m. 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 large-sized contracts by end-2019 – this should further contribute towards its PATMI growth in FY20F-21F.

Maintain BUY

• With the improving fundamentals and strong earnings growth as of 1HFY19, Silverlake is on track for a healthy 2019.
• We expect the strong earnings growth and margin improvement to continue into 3Q19F and 4Q19F as it continues to execute the large size Malaysian contract.

Source: RHB Invest Research - 15 Feb 2019