• Silverlake Axis's 4Q19 net profit was in line with our expectations, but below Bloomberg consensus.
• Although Silverlake Axis’s orderbook backlog of RM260m remains healthy, the absence of large-sized project wins could pressure margins in FY20F.
• We also lower our dividend payout expectations as Silverlake Axis is reserving cash for further M&As. Resume coverage with a HOLD rating and Target Price of S$0.53.

4QFY19 Core Net Profit in Line With Expectations

• SILVERLAKE AXIS LTD (SGX:5CP) reported 4QFY6/19 core net profit of RM57.4m (+58.2% y-o-y), on the back of 30.1% y-o-y topline growth, which we attribute to stronger project-related revenue. FY19 core net profit was in line with our expectations at 102% of our previous FY19F, but only came in at 94% of Bloomberg consensus forecasts.

Industry Prospects Remain Promising…

• Silverlake Axis is actively pursuing over RM500m worth of contracts, mainly in Indonesia and Thailand. Management expects to benefit from the rise in digital initiatives among banks, as well as further consolidation of the banking industry in developing countries.
• New digital banks are also potential targets for new projects; we gather that Silverlake Axis has been approached to explore possible software solutions to support new digital bank operations.

…but Absence of Large-sized Project Wins Could Start to Hurt

• However, given the absence of major order wins in recent months, we expect Silverlake Axis’s project-related revenue growth to soften beginning in 2QFY20, and forecast Silverlake Axis’s FY20F revenue growth to decelerate to 5.5% y-o-y. We estimate the current orderbook backlog of RM260m is made up predominantly of projects with smaller scope (and hence, lower margins), and expect the unfavourable revenue mix to result in GPM contraction in FY20F to 60.2% (FY19: 62.6%).
• The expiry of pioneer status of a Malaysian subsidiary could also result in a higher effective tax rate; as a result, we are only forecasting Silverlake Axis to record 0.2% EPS growth in FY20F.

Reserving More Cash for Acquisitions; Expect Lower Dividend Yield

• Silverlake Axis declared a DPS of 0.7 Scts for the quarter (c.80% dividend payout ratio), bringing FY19 DPS payout to 60%. However, management indicated that it would conserve cash for potential M&As. We thus lower our DPS forecasts, which now imply 3.2-3.6% dividend yield in FY20-22F. See Silverlake Axis's dividend history.

Resume Coverage With HOLD and Target Price of S$0.53

• Our FY20-21F EPS are cut by coverage with a HOLD rating and Target Price of S$0.53, based on 19.2x CY20F P/E (1 s.d. below its 5-year historical average).
• Potential share price catalysts include major core banking contract wins.
• Deferred tech spending by banks in ASEAN is a key downside risk to our call.

Source: CGS-CIMB Research - 24 Aug 2019