SINGAPORE (Feb 16): CIMB is recommending investors “buy” Silverlake Axis only for its special dividend.
This comes after the latter sold off its 11.26% stake in Global InfoTech Co. (GIT) for estimated cumulative cash proceeds to RM364 million ($116 million).
“We believe the cash proceeds are earmarked for expansion of the Merimen insurance processing business (both organically and inorganically), as well as for a special dividend in FY17F,” says analyst William Tng in a Wednesday report.
Tng says Silverlake’s 2Q17 core net profit made up just 10% of its full-year forecast as revenue fell 29% y-o-y. Maintenance and enhancement services (MES) revenue rose 12% y-o-y to account for 82% of total revenue.
Insurance processing revenue increased 19% y-o-y while other business segments registered double-digit decline. Gain on disposal of GIT shares was RM223.9 million ($71.4 million). Excluding one-off gains, core net profit fell 69% y-o-y.
Silverlake says revenues from MES and insurance processing were recurrent and stable but project-related revenue segments were negatively affected by reduction in customers’ capex.
It has started work on core IT system replacement contracts secured in past few months and expects initial revenue recognition in 2H17.
It is responding to proposal requests and is canvassing existing and potential customers for core IT replacement and digital banking upgrade contracts.
“We cut FY17-19F core EPS by 5-31% to account for slower revenue growth in the software licensing and project services segments,” says Tng.
“We also have not factored the potential special DPS into our forecasts as repatriation of proceeds from the sale of GIT shares is subject to regulatory approval,” adds the analyst.
As a result, CIMB’s DCF-based target price falls to 65 cents.
Potential re-rating catalysts include significant order win announcements, elimination of related-party transactions and special dividends. A key risk is pullback in customers’ rollout schedules.
Shares of Silverlake are up 2 cents at 60 cents.
