This article first appeared in The Edge Financial Daily on March 9, 2018
Scicom (MSC) Bhd
(March 8, RM1.96)
Maintain buy with a higher target price (TP) of RM2.93: We are positive on the prospects of Cambodia’s tourism sector — Scicom (MSC) Bhd has recently secured a project from Cambodia’s tourism ministry to develop, implement, operate and maintain a fully integrated Cambodia Tourism Management System.
The revenue from this contract hinges on the number of air travellers to and from Cambodia that gives Scicom an exposure to the fast-growing Cambodia tourism market (2016A: 2.7 million international tourist arrivals by air, US$3.2 billion total tourism receipts). Assuming a fee of US$1 per international tourist per flight (payable to Scicom), and earnings before interest, taxes, depreciation and amortisation margins of 45%, the project should contribute RM12 million to RM16 million of net profit in financial year 2019 estimated (FY19E) to FY20E (about 22% to 27% of the group’s net profit).
Existing business should see recovery in the first half of 2018 estimated (1H18E). Scicom’s share price has declined by 15% year-on-year, attributable to weaker six months of 2018 net profit (-16% due to lower revenue and strengthening of the ringgit) and the long lull since the last major contract win in 2013.
Moving into 1H18, we expect an increase in Education Malaysia Global Services fee collection (+20%) to mitigate the impact from a lower number of foreign student applications. Elsewhere, we expect its business processes outsourcing volume to stabilise before recovering in 2H18, however, the higher 2HFY18 pre-tax profit would be offset by normalisation of tax rate to more than 20% (from 10% in 1HFY18).
We reiterate our “buy” rating on Scicom with a higher TP of RM2.93 (from RM2.54) based on 20 times FY19E price-earnings ratio (PER) (from 20 times 2018 estimates PER). We like Scicom for its expertise in the e-government services/e-solution segment, high return-on-equity business model (42% in FY17), FY17 to FY20E earnings compound annual growth rate of 10%, strong balance sheet (net cash) and attractive valuation of 13 times FY19E PER/5% dividend yield, with the Cambodia tourism project a major earnings catalyst. — Affin Hwang Capital Research, March 8.