• Keep BUY on this country pick, SGD0.65 Target Price offers 18% upside plus 4% FY19F yield.
• SILVERLAKE AXIS LTD (SGX:5CP)’ 2QFY19 revenue/PATMI surged 28%/84% y-o-y, mainly on wider margins stemming from licensing revenue jumping 98% y-o-y as it continued to implement a major Malaysian contract. This outperformance should continue into the rest of 2HFY19, which may lead to stellar results again, in 3QFY19.
• We expect 3QFY19 to be upbeat, on continued margin improvement and a positive PATMI uptrend.

Higher Dividend Payout Ratio in 2HFY19

• Management is keen on rewarding shareholders with a higher dividend yield. In addition, we believe Silverlake will likely engage in more share buybacks, similar to what was done in 2018 – which is a positive.
• As of 2QFY19, Silverlake declared total DPS of SGD0.007, or roughly 50% of 1H19 PATMI. For 2HFY19, management guided that it will likely look to increase the payout ratio.
• Historically, Silverlake has forked over 80% of earnings as dividends. See Silverlake's dividends. Based on its previous share buyback exercises, we expect the dividend payout ratio to be 70% for 2HFY19, resulting in a 4% FY19F yield.

Potential Large Contract Wins From Indonesia and Thailand

• As of end- 2QFY19, Silverlake’s orderbook stood at MYR280, down from MYR325m in 1QFY19.
• 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 of securing additional large-sized contracts by the end of 2019, especially from these countries – which should further contribute towards PATMI growth in FY20-21.

2019 a Sturdy Year

• With the improving fundamentals and strong earnings growth as of 1H19, Silverlake is on track for a robust 2019. We expect the strong earnings growth and margin improvement to continue into 3Q19 and 4Q19, as it continues to execute the large-sized Malaysian contract. As such, we maintain BUY with an unchanged DCF-backed Target Price of SGD0.65.
• Silverlake remains one of our top country picks for 2019. (See also report: Singapore Equity Strategy - Headwinds Persist; Stick With Quality!)
• Key downside risks to our call are an economic recession and banks cutting their capex budgets.

Source: RHB Invest Research - 28 Mar 2019