CGS International (CGSI) has downgraded its call on Silverlake Axis 5CP (SAL) from “hold” to “reduce”, and lowered its target price from 30 cents to 25 cents.
This follows SAL’s full year results which saw a core net loss of RM8 million ($2.4 million). SAL also announced that it will take the company private at 36 cents per share on Aug 26.
However, the analyst’s key derating catalyst is the impending US Federal Reserve (US Fed) rate cut, which may affect overall technology investment sentiment.
CGSI’s Andrea Choong says that the software company was weighed down by operating expenses (opex) and delivery costs.
The group’s 4QFY2024 core net loss was below Choong’s RM70.4 million core net profit estimates, and the miss was primarily due to heftier cost of goods for the deployment of projects, opex attributable to staff increments and headcount as well as R&D costs.
SAL also incurred one-off costs for staff gratuities and professional fees for business optimisation.
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Choong says that the 4QFY2024 revenues were also below her expectations due to delays in the implementation of several core banking system projects. “A lack of resources at both SAL and its customers contributed to the delays. SAL expects to recognise these revenues in the coming quarters,” the analyst adds.
Choong highlights that SAL declared a final distribution per share of 0.36 cents in 4QFY2024, which translates into a dividend payout ratio of some 28%, lower than the 0.73 cents she had expected.
Given the impending US Fed rate cuts, which could affect overall technology investment sentiment, Choong says the group’s opex may take time to ease.
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The group recorded RM110 million worth of contract wins in 4Q2024, bringing its total contract wins to about RM500 million in FY2024. Its deal pipeline stood at about RM1.7 billion as at end June, and management deems about RM270 million worth of these deals to have a high probability of closure in the coming quarters.
Yet impending rate cuts remain a key concern for Choong. “Given the ramp-up of SAL’s staff and development costs to support project deliveries over the past two years (opex up 15%-16% y-o-y in FY2023-FY2024) and its focus on innovation, we think cost control could take time to materialise,” she says.
Apart from the project delays, SAL’s revenue mix in FY2024 was structurally affected by the absence of higher-margin licencing deals, a trend the analyst expects to persist given the chunky nature of these deals.
Given SAL’s elevated opex and challenging revenue growth prospects, Choong cuts her FY2024-FY2026 earnings per share estimates to reflect this.
CGSI’s target price for SAL is lowered to 25 cents and pegged to 17.5 times its calendar year (CY) 2025 P/E, its five-year mean.
As at 3.54pm, shares in Silverlake Axis are trading 7.5 cents higher or 25% up at 37.5 cents.
