SINGAPORE (June 20): RHB is maintaining its “buy” call on Silverlake Axis with a target price of 65 cents.
The group’s financial performances for FY17-18 have been poor as regional banks pull back on major IT spending the past two years.
See: Silverlake posts 93% drop in 3Q earnings to $9.74 mil on significantly lower other income
In a Wednesday report, analysts Jarick Seet and Lee Cai Ling says, “However, we understand these banks are now open to large IT capex again, with some needing to upgrade core banking systems. This trend is justified by Silverlake’s contract wins over the last few months and orderbook at near record highs.”
With the group winning several sizable contracts recently, such as the upgrading of Malaysia Building Society’s core banking system, its existing orderbook has reached RM380 million ($128.7 million), nearing peak levels.
See: Silverlake Axis secures new core banking contract.
See also: Silverlake Axis secures contract from Malaysia Building Society for merged entity
The group’s management has also said that it is in talks with a few Indonesian financial institutions that are looking to upgrade their core banking systems.
“We estimate each of these contracts to be worth RM150-200 million and implemented over a 2-year period. Thus, we expect these factors to translate into earnings visibility and potentially add on to its 89.8% surge in net profits, especially in FY19 (Jun),” says Seet and Cai.
In FY17-18, dividends were mostly supported by special dividends from share sales in the group’s China-listed associated Global InfoTech (GIT). And with earnings having taken a hit, dividends from recurring NPAT have plunged.
Nonetheless, the analysts expect the group’s recurring dividends to recover to 5.7% in FY19, with a projected recovery going forward.
In addition, proceeds from further sales of GIT shares are likely to translate into special dividends to shareholders – further increasing the dividend yield.
The group has also been buying back shares, with 31.8 million shares being bought back YTD.
On the other hand, the group’s insurance business has been experiencing double-digit growth since inception, and management has expressed interest in doing acquisitions to hasten the growth pace.
“As we see it, once its insurance revenue reaches a more sizable base, a spin-off should be possible. This ought to benefit shareholders and – at the same time – provide the insurance business with ample resources to grow at a faster speed,” add Seet and Cai.
The analysts also believe that with the group’s strong orderbook, it has potential PATMI growth ahead, while its bottomed business cycle is likely to cause earnings to surge over the next few years.
Meanwhile, positive signs from Silverlake’s licensing and project services revenue streams in 3Q18 also point towards a strong outlook.
As at 11.20am, shares in Silverlake are trading 52 cents or 17 times FY19 earnings with a dividend yield of 5.7%.
