• Downgrade to NEUTRAL from Buy, new DCF-backed Target Price of SGD0.46 from SGD0.56, 7% upside with 7% FY20F (Jun) yield.
• SILVERLAKE AXIS (SGX:5CP)’s 1QFY20 PATMI fell 19% y-o-y, mainly on higher administrative expenses and finance costs.
• While we wait for large-sized contracts to be won, we take a conservative approach and downgrade our call.
• On higher-than-expected costs, we also cut FY20F earnings by 10%, which results in a lower target price.

Higher Dividends Only Possible If It Scores Large Contracts

• Management said it is keen on rewarding shareholders with better dividends. Historically, the company has paid > 80% of earnings as dividends. However, due to the drop in earnings, dividends are likely to decrease unless it wins a large contract.
• We expect the dividend payout ratio for FY20F to be around 60-70% of earnings, resulting in a FY20F yield of 6.9%.

MYR300m Orderbook With Potential Large-sized Contract Wins Pending

• As at end-1QFY20, Silverlake Axis's orderbook stood at MYR300, up from in MYR290m in end-4QFY19. 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 Axis is also confident on securing additional large-sized contracts by end-2019 – this should further contribute towards PATMI growth in FY20-21. However, while waiting for contracts to arrive, we expect earnings to be negatively impacted by higher costs and higher tax rates due to the expiry of the company’s pioneer status.

Outlook Depends on Large Contract Wins

• With the improving fundamentals and stronger earnings growth as at FY19, Silverlake Axis is on track for a decent FY20 – but PATMI will likely be negatively impacted by higher effective tax rates and higher costs.
• Large contract wins from Indonesia and Thailand should be the next catalysts for it – in terms of earnings as well as a share price re-rating. Until then, we rate this stock as NEUTRAL, as we conservatively expect weaker earnings ahead.
• Key risks: An economic recession and slowdown in banks’ capex spending.

Source: RHB Invest Research - 18 Nov 2019