This article first appeared in The Edge Financial Daily on November 15, 2017
Scicom (MSC) Bhd
(Nov 14, RM1.87)
Maintain buy with an unchanged target price (TP) of RM2.54: Scicom (MSC) Bhd recorded a 11.9% year-on-year (y-o-y) decrease in revenue for its first quarter ended Sept 30, 2017 (1QFY18) as its outsourcing business segment faced a reduction in billable revenue for certain projects as a result of a change in clients’ requirements and/or strategies.
Scicom’s revenue remained weak, contracting for the third consecutive quarter in 1QFY18. However, 1QFY18 core net profit of RM11 million (up 1% y-o-y) was in line with our expectations. We remain optimistic about Scicom’s ability to grow revenue from securing more business process outsourcing (BPO) contracts and the growth in student visa processing, due to growing demand for Malaysian tertiary education.
The group’s education business generated revenue for the quarter but this was immaterial at RM85,000. Core net profit for 1QFY18 actually improved slightly by 1.1% y-o-y due to an improvement in earnings before interest, taxes, depreciation and amortisation (Ebitda) margin at 28.7%, which was tracking ahead of our expectation of 24.1% for financial year ending June 30, 2018 (FY18), likely due to a better contribution from its higher-margin Education Malaysia Global Services (EMGS) segment.
On the other hand, earnings remained fairly stable (at a range of between RM11 million to 12 million per quarter) despite the revenue decline, potentially due to an increased contribution from its EMGS business. This was also reflected in the improved y-o-y Ebitda margins, which were up three percentage points in 1QFY18.
We like Scicom as we think it is an attractive e-government service play, underpinned by stable earnings from student visa processing. We are also positive about Scicom’s growth moving forward with the replenishment of BPO contracts. We maintain our “buy” rating, maintaining a TP of RM2.54 based on an unchanged 20 times price-earnings ratio. — Affin Hwang Capital Research, Nov 14