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CGS International has reduced its call on Silverlake Axis : 5CP 0% to “hold” from “add” with a lower price target of S$0.31 versus S$0.36 previously, as it anticipates the group’s operating expenditure (opex) levels to remain elevated in the near term amid declining margins.
This comes after the enterprise technology, software and services company reported higher-than-expected opex and a weaker gross profit margin for its third quarter ended March 2024.
In a Wednesday (May 15) report, analyst Andrea Choong said she expects opex to be “elevated for the time being” despite a recent hiring freeze enforced by Silverlake to stem the rise.
This is because effects from the hiring freeze “may take time to materialise” in view of the group’s ongoing implementation of its previous contract wins over past quarters, she explained.
A potential structural change in the composition of the group’s revenue mix towards lower-margin incremental tech upgrades may also affect the group’s gross profit margin (GPM) going forward, added Choong.
“Although Silverlake remains confident of total revenues surpassing its RM800 million target for FY2024, we think its core net profit may be affected by a lower GPM run rate given its tapering composition of higher-margin licencing fees,” said the analyst.
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CGS’ GPM estimates for Silverlake over FY2024 to FY2026 were consequently cut by 53 to 54 per cent, versus 58 per cent previously.
This, in addition to raising its opex forecasts, has led the research house to lower its earnings per share forecasts by 15 to 20 per cent over FY2024 to FY2026.
The resultantly-lower price target nonetheless remains pegged to a 14 times price-to-earnings ratio, which Choong noted to be one standard deviation below the stock’s 10-year mean.
Shares of Silverlake were S$0.005 or 1.7 per cent down at S$0.285 as at the midday break on Wednesday.
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