Scicom (MSC) Bhd
(Aug 19, RM1.64)
Maintain buy with an unchanged target price (TP) of RM2.39: With steady earnings coming from its business process outsourcing (BPO) segment and e-government service contract, which now includes language schools and public higher learning institutions, we expect Scicom (MSC)’s financial year ended June 30, 2015 (FY15) results to be within our expectations. Coupled with an attractive order book pipeline, we reaffirm our “buy” call and TP of RM2.39. No major negative surprise expected in its FY15 results.

Scicom (MSC) is due to release its fourth quarter ended June 30, 2015 (4QFY15) quarterly financial results tomorrow. We do not expect any major negative surprises as the Education Malaysia Global Services contract is progressing smoothly and is complemented by stable earnings from the BPO segment.

While the initial number of visa applications from language-school students is minimal as some adjustment time is required, we are not too concerned as earnings should pick up in the next financial year when processes become familiar.

At our recent meeting with the company, the management noted that Scicom’s BPO pipeline was robust and that it was in the final stages of contract bids of around RM50 million. This gives us confidence in the company’s ability to hit our 10% top-line growth forecast for FY16.

Meanwhile, we believe that Scicom’s diverse client base should minimise the risk from Malaysia’s economic and political concerns as the management has guided that more than 50% of its revenue is derived from clients whose business operations are outside of Malaysia and from various industry segments.

Although the current weak ringgit is an advantage to overseas clients, 85% of Scicom’s receivables are in ringgit. Thus, while a weaker ringgit is positive for the company, we do not see a significant impact on earnings.

Scicom is also looking to expand its presence in the e-government services sector as negotiations on several regional contracts are ongoing.

We continue to like Scicom for its strong growth prospects, sound financial position (ungeared net cash position of RM26 million as of 3QFY15) and FY15 to FY17 estimates dividend yields of 4.5% to 5%. We reaffirm our “buy” call and 12-month TP of RM2.39, based on 20 times calendar year 2016 earnings per share. Key risks to our call include the loss of BPO customers and lower-than-expected foreign students. — Affin Hwang Capital, Aug 19

This article first appeared in digitaledge Daily, on August 20, 2015.