Scicom’s 1QFY18 revenue decreased by 12% yoy due to changes in clients’ requirements resulting in reduced billables. However, Scicom’s 1QFY18 core net profit of RM11m (+1% yoy) was in line with our expectation. We remain optimistic on Scicom’s ability to grow revenue from securing more BPO contracts and the growth in student visa processing, due to growing demand for Malaysian tertiary education. Maintain BUY with an unchanged TP of RM2.54.

1QFY18 Revenue Down 12% Yoy, Core Net Profit Up 1.1% Yoy

Scicom recorded a 1QFY18 decrease in revenue of 11.9% yoy 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. The Group’s education business generated revenue for the quarter but this was immaterial at RM0.085m. Core net profit for 1QFY18 actually improved slightly by 1.1% yoy due to an improvement in the EBITDA margin at 28.7%, which is tracking ahead of our FY18E expectations of 24.1%, likely due to a better contribution from its higher-margin EMGS segment.

Earnings Stable as Revenue Mix Changes

Scicom’s revenue has remained weak, contracting for the third consecutive quarter in 1QFY18. On the other hand, earnings have remained fairly stable (at a range of between RM11-12m per quarter) despite the revenue decline, potentially due to an increased contribution from its EMGS business. This is also reflected in the improved EBITDA margins yoy, which were up 3ppts in 1QFY18.

Maintain BUY and Target Price of RM2.54

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 on Scicom’s growth moving forward with the replenishment of BPO contracts. We maintain our BUY rating, maintaining a target price of RM2.54 based on an unchanged 20x PE. Risks to our recommendation include a loss of outsourcing business customers and fewer-than-expected foreign students.

Source: Affin Hwang Research - 14 Nov 2017