• Maintain BUY on this top sector pick, DCF-based Target Price of SGD0.65, 30% upside with 4% FY19F (Jun) yield.
• With improving fundamentals and strong earnings growth, Silverlake Axis should record robust numbers in 2019. The healthy growth and margin improvement should continue into 4Q19, as it is still executing a large Malaysian contract.

A Superb 3QFY19

• As we expected, SILVERLAKE AXIS LTD (SGX:5CP) reported splendid 3QFY19 numbers, with revenue up 12% y-o-y and PATMI surging 77% y-o-y. This was mainly due to its margin expansion from licensing revenue growing 73% y-o-y, as it continued to execute the large Malaysian contract. In addition, project services continued to grow by 21% y-o-y.

Roadblock for Further Upside Cleared

• On 29 Jan, > 39m Silverlake Axis shares were crossed. Our channel checks indicate that this block was potentially from a former substantial shareholder – the Chinese conglomerate, HNA – who over the past months has been selling in the open market. This partially led to a muted Silverlake Axis' share price performance.
• With the overhang now gone, we are optimistic that the stock will undergo a positive rerating, reflecting Silverlake Axis’s value.

Higher DPS in 4QFY19

• Management said it is keen on rewarding shareholders with better dividends. In addition, we believe Silverlake Axis will likely engage in more share buybacks, similar to what was done in 2018 – which is a positive.
• As of 3QFY19, it declared a total of SGD0.004 in DPS, vs SGD0.003 a year ago. For 4QFY19, management guided that it will likely look to increase the payout ratio further.
• Historically, Silverlake Axis has paid over 80% of earnings as dividends. See Silverlake Axis' dividend history.
• Due to previous share buybacks, we expect its dividend payout ratio for 2HFY19 to be 60-70%, resulting in a projected FY19F yield of 4.4%.

MYR250m Orderbook With Potential Large Contract Wins Ahead

• As of end-3Q19, Silverlake Axis’ orderbook stands at MYR250, down from MYR280m in 2QFY19. 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.
• Management is also confident of securing additional large contracts by the end of 2019 – which should further contribute towards PATMI growth in FY20-21.
• Silverlake Axis is one of the RHB's Singapore 20 Jewels 2019 Edition - Top Singapore Small Cap Companies.

Source: RHB Invest Research - 15 May 2019