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KGI initiates coverage on Silverlake Axis with 30 cents TP

Samantha Chiew
Samantha Chiew • 2 min read
KGI initiates coverage on Silverlake Axis with 30 cents TP
Silverlake Axis' lake may be shrinking but new ponds are forming
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SINGAPORE (July 9): KGI Securities is initiating coverage on Silverlake Axis with “outperform” and a target price of 30 cents.

Silverlake Axis has strong, multi-year relationships with key Asian banks and other financial institutions, providing and servicing their core banking systems.

Despite COVID-19 leading to lower project revenue due to delays, banking clients have stepped up requests for more maintenance works, essentially leading to minimal sales fall-off.

While this has helped cushion Silverlake’s sales drop, the company has also seen little to no cancellation in orders. Management is also expecting a large contract to be signed in early FY21.

In the short-term, banks are likely to cut down on IT spending due to Covid-19, but are likely accelerate digitalisation plans after this period. Hence, banks' long-term capex plans are not expected to see a large impact.

Furthermore, the proliferation of the Software-as-a-Service (SaaS) business will soon serve as yet another stable, recurring revenue stream for Silverlake. The business is now in the early stages of expansion into Japan.

On that note, Silverlake can also see decent order book gains, should they manage to successfully partner with digital banking licensees.

Analysts Kenny Tan and Joel Ng said in a Thursday report, “While corporate purses for IT spending will be tightened in a post-COVID world, we expect a shift to cloud spending, where Silverlake has also pivoted towards with their latest business strategies.”

Currently, the company maintains a healthy balance sheet that can continue funding acquisitions to have a better fighting chance in the cloud space.

Meanwhile, the analysts’ target price of 30 cents is based on 13 times FY21 estimated EPS, which in return is about 32% discount to Indian competitors, and 48% discount to European and American peers, as well as below Silverlake’s average price-to-earnings ratio in the past five years.

“We can expect further upside if highlighted catalysts occur, or when banks resume regular spending practices,” says Tan and Ng.

Based on the stock’s current price of 25 cents, the analysts have assumed a 50% dividend payout ratio, which translates to future dividend yields between 4.2 – 5.0%.

“It is possible that Silverlake maintains current dividend of 1.8 Scts, a 7.2% dividend yield, since they have the cash for it, but we think that is an unlikely scenario,” adds Tan and Ng.

As at 12.50pm, shares in Silverlake Axis are trading at 26 cents.

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