Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly on February 26, 2018 - March 4, 2018

SCICOM (MSC) Bhd’s share price has been hammered in the past 12 months because it was unable to secure new contracts, such as e-government outsourcing works, abroad. In addition, earnings were hit by higher taxation due to the expiry of its five-year tax exemption in November 2016.

The stock plunged from its peak of RM2.29 in June last year to a two-year low of RM1.54 in mid-December. But just when investors were preparing to let it drop off their radar screens, Scicom announced that it had clinched a contract in Cambodia and the counter rebounded to close at RM1.95 last Friday.

The contract is to develop, implement, operate and maintain the integrated Cambodia Tourism Management System for the tourism ministry.

“[The Cambodian contract] will boost our bottom line by double digits from the next financial year (ending June 30, 2019 [FY2019]) — more than 10%,” Scicom CEO and founder Datuk Seri Leo Ariyanayakam tells The Edge in an exclusive interview.

The contract is to help the Cambodian government to manage and promote high-end tourism, including tasks like collecting and analysing big data for the tourism ministry. It will be a fresh recurring income stream for Scicom, says Leo. Income will be based on the number of tourist arrivals in Cambodia but he declines to divulge further details due to confidentiality.

To put things in perspective, tourist arrivals have been rising in Cambodia in the past five years. Some 5.01 million arrived in 2016, up from 4.78 million in 2015, according to Cambodia’s Ministry of Tourism website.

Currently, Scicom’s Education Malaysia Global Services project — which is an official gateway for international students to apply for tertiary education in Malaysia — is a steady recurring income source.

Leo acknowledges that investors were disappointed that Scicom was unable to secure new contracts over the past two years or so. “But to be fair to us, it is dependent on external factors that are beyond our control, such as political factors.”

He cites Sri Lanka, where the change of government interrupted its attempts to get an e-government project. He stresses that winning an e-government contract does not happen overnight. “A lot of effort and time are needed.” But he hints that there are proposed projects in the pipeline that stand a good chance of materialising this year.

Leo says Scicom’s target market is developing countries, adding that it is trying to get into about 60 different countries. Currently, Scicom is in various stages of discussion in more than 20 countries. “We are definitely going to get something this year. The scope of opportunities is immense. This will be an interesting year for Scicom.”

Leo — who is the single largest shareholder with 24.92% equity interest — is confident Scicom will be out of the doldrums soon. Apart from potential opportunities in business process outsourcing, Leo expects to see a slew of e-government solutions contracts, in which the group will service  governments in areas such as border control, e-visas and biometric technology.

In terms of earnings performance, while Scicom’s earnings in FY2018 have not been impressive so far, he is optimistic that all of its businesses will see a turnaround in FY2019, with expectations of more contracts to be secured. He points out that earnings will see a dip in FY2018 due to higher taxes after the expiry of the tax exemption.

For the six months ended Dec 31, 2017, net profit was 15.6% lower year on year at RM20.38 million or 5.73 sen per share. Revenue shrank 14.25% to RM88.85 million y-o-y.

Only MIDF Research and Affin Hwang Investment Bank Bhd are tracking Scicom and both have a “buy” call.

“We reiterate our “buy” call, which is premised on Scicom’s improving outlook ...  supported by an attractive dividend yield of 5.4% (based on a share price of RM1.67),” writes MIDF Research analyst Ng Bei Shan in a Feb 12 note.

Ng forecasts a net profit of RM40.92 million, or 11.51 sen per share, for FY2018 and RM45.82 million, or 12.89 sen per share, for FY2019. She expects revenue to be RM209.46 million and RM230.41 million respectively.

Affin Hwang Investment Bank Bhd analyst Isaac Chow says the research house recommends the stock to its clients for its expertise in the e-government services or e-solution segment, high return-on-equity (ROE) business model and attractive valuation of 12.4 times FY2018 price-earnings ratio.

ROE was 45.33% in FY2015, 48.18% in FY2016 and 45.43% in FY2017.

Sitting on a net cash pile of RM28.08 million, Scicom is in a position to declare regular dividends even though earnings were lower. In addition, it had investment in cash funds amounting to RM13.23 million as at Dec 31 last year.

When asked about Scicom’s dividend payments going forward, Leo says, “I want to pay as much as possible.” Scicom has been rewarding its shareholders with an average of more than 70% of profits in the last three to four financial years and Leo says it will maintain that payout ratio.

While the Cambidian contract has raised hopes of improving prospects, it is crucial for Scicom to keep up the momentum to clinch more contracts so investors won’t feel let down again.

 

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share