Scicom’s 9MFY17 core net profit of RM32.5m (+2.4% yoy) was below expectations as 3QFY17 earnings were hit by a decline in egovernment service (EMGS) revenue due to stricter conditions for foreign students, which affected the number of applications. Notwithstanding, we still believe that Scicom is likely to extend its egovernment services regionally. Maintain BUY and TP of RM2.74.

3QFY17 Core Net Profit Declines on Lower Revenue

Scicom recorded a 3QFY17 decrease of revenue by 2.9% yoy and 5.4% qoq to RM48.8m as we gather that stricter conditions for foreign students had affected the number of student applications this quarter, causing revenue for the EMGS segment to decline. As such, 3QFY17 core net profit decreased by 13.2% yoy and 5.5% qoq to RM10.5m, with yoy recording a larger decline as 3QFY16 saw a larger forex loss vs a forex gain in 3QFY17.

9MFY17 Earnings Increases by 2.4% Yoy, EBITDA Margin Expands

Nonetheless, 9MFY17 revenue increased by 6.9% yoy to RM 152.4m and, after stripping out forex gains vs forex losses in 9MFY16, core net profit rose by 2.4% yoy to RM32.5m. The results were below expectations, accounting for 69% of our full-year forecast. The 9MFY17 EBITDA margin improved by 1.6ppts to 26.6%, likely due to cost efficiencies from economies of scale. Scicom declared a 3Q17 interim DPS of 2 sen, bringing the 9MFY17 DPS to 6 sen (vs 9MFY16 DPS of 6 sen).

Still 70% Tax-exempt Until November 2017

Recall that Scicom’s Multimedia Super Corridor (MSC) status expires in November 2017, and the company’s business income is currently 70% taxexempt for the remainder of its MSC status. Hence, we are assuming tax rates of 7% in FY17, 14% in FY18 and 24% in FY19.

Maintain BUY and Target Price of RM2.74

We lower our FY17-19E earnings by 2-6% as we have cut assumptions for the number of visa applications. We still like Scicom as we think it is an attractive e-government service play, underpinned by stable earnings from the BPO business. We remain optimistic on the group’s foray into egovernment service contracts regionally. We roll forward our valuation to CY18 and maintain our BUY rating, with an unchanged 12M target price of RM2.74 based on an unchanged 20x PE. Risks to our recommendation are a loss of BPO customers and fewer-than-expected foreign students.

Source: Affin Hwang Research - 23 May 2017