SINGAPORE (June 20): RHB Research is keeping Silverlake Axis as its top pick in Singapore and in the technology sector, as the digital economy solutions and services provider stays on track to finish the year on a high.

“With improving fundamentals and strong earnings growth as of 9M19, Silverlake Axis is on track to record a robust FY19,” says lead analyst Jarick Seet in a Wednesday report.

“We expect the sturdy growth in earnings and margins to continue into 4Q19, as it continues to execute the major Malaysian core banking contract,” he adds.

The group saw its PATMI surge 77% y-o-y in 3Q19, as margins from licensing revenue growth nearly doubled, while revenue rose 12% y-o-y.

And Seet expects Silverlake to continue on this trajectory to see similar growth for 4Q19.

“Silverlake should book a positive 4Q19F performance, on continued margin and positive PATMI growth,” he says.

RHB is maintaining its “buy” rating on Silverlake Axis with an unchanged target price of 65 cents, representing an upside of 18%.

Looking ahead, the analyst says potential large order wins from the region could lift Silverlake’s PATMI even further.

“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,” Seet says.

Silverlake has signalled that it is confident of securing additional large-sized contracts by the end of 2019, which Seet believes should further contribute towards PATMI growth in FY20-21.

As at end 3Q19, Silverlake’s orderbook stood at RM250 million.

At the same time, the management has said that it intends to reward shareholders with better dividends.

The group declared distribution per share of 0.4 cents in 3Q19, 33% higher than DPS of 0.3 cents a year ago. And the management has guided that it will likely look to increase the payout ratio further for 4Q19.

Historically, the group has paid over 80% of earnings as dividends.

“In addition, we believe Silverlake will likely engage in more share buybacks, similar to what was done in 2018 – which is a positive,” says Seet. “Due to previous share buybacks, we expect its dividend payout ratio for 2H19 to be 60-70%, resulting in a projected FY19 yield of 4%.”

As at 1.15pm, shares in Silverlake are trading flat at 55 cents, or 7.7 times FY19 book.