Scicom’s FY17 core net profit of RM44.4m (+8.8% yoy) was in line with our expectations. 4QFY17 bottom-line declined by 11.2% yoy due to lower revenue from both outsourcing business and e-government service (EMGS) segments. We think revenue from Scicom’s egovernment services have potential to grow due to rising demand for tertiary education in Malaysia among foreign students from Southeast Asia region, but stricter conditions imposed on foreign students could affect earnings over the near term. Maintain BUY but with a lower TP of RM2.54.

4Q17: Revenue Down 12.3% Yoy, Net Profit Down 11.2% Yoy

Scicom recorded a 4QFY17 decrease of revenue by 12.3% yoy, mainly due to a 12.1% decline in revenue from the outsourcing business segment. Full year 2017 revenue rose slightly by 1.6% yoy to RM199.5m (FY2016: RM196.3m) due to higher revenue from both segments, whilst net profit increased by 8.2% yoy to RM45.4m on the back of falling operational cost resulting from economies of scale. Stripping off exceptional items, core net profit increased by 8.8% to RM44.4m, in line with our full year forecast.

4Q17’s Top-line Fell 3.5% Qoq

4Q17’s revenue fell due to a reduction in billable headcount for some of their projects under the outsourcing business segment, as a result of a change in clients’ requirements. Nevertheless, the decrease in revenue from billable headcount was offset by more projects secured, amounting to RM8.8m for 4Q17. We are positive on the Group’s effort in constantly upgrading the services provided and maintaining diversified customer base. Given that its outsourcing business segment depends on the growth of its customers, having a diversified customer base from different sectors help to mitigate risks from changes in customers’ demand.

Maintain BUY With Lower Target Price of RM2.54

Although we think there is rising demand for tertiary education in Malaysia among foreign students, we cut our earnings slightly for FY18-19E as we expect stricter conditions imposed on foreign students to curtail growth. We still like Scicom as we think it is an attractive e-government service play, underpinned by stable earnings from student visa processing. We maintain our BUY rating, but with a lower 12M target price of RM2.54 based on an unchanged 20x PE. Risks to our recommendation are a loss of outsourcing business customers and fewer-than-expected foreign students.

Source: Affin Hwang Research - 28 Aug 2017