We reiterate our BUY rating on Scicom with a higher target price of RM2.93 (56% upside), based on 20x FY19E PER, after imputing the earnings projections for its recently secured Cambodia Tourism project. The project gives Scicom an exposure to Cambodia’s vibrant tourism sector, and should lift the group’s FY19-20E EPS by 30-35%. Overall, we continue to like Scicom for its expertise in the egovernment services / e-solution segment, high ROE business model, FY17-20E earnings CAGR of 10% and attractive valuation of 13x FY19E PER / 5% dividend yield.

We Are Positive on the Prospects of Cambodia’s Tourism Sector

Scicom recently secured a project from Cambodia’s Ministry of Tourism to develop, implement, operate and maintain a fully integrated Cambodia Tourism Management System. The revenue from this contract hinges on the number of air travellers to and from Cambodia. The project gives Scicom an exposure to the fast-growing Cambodia tourism market (2016A: 2.7m international tourist arrivals by air, US$3.2bn total tourism receipts). Assuming a fee of US$1 per international tourist per flight (payable to Scicom), and EBITDA margins of 45%, the project should contribute RM12m-16m of net profit in FY19-20E (~22-27% of group’s net profit).

Existing Business Should See Recovery in 1HCY18E

Scicom’s share price has declined by 15% yoy, attributable to weaker 6MFY18 net profit (-16% due to lower revenue and strengthening of RM) and the long lull since the last major contract win in 2013. Moving into 1HCY18, we expect an increase in EMGS fee collection (+20%) to mitigate the impact from a lower number of foreign student applications. Elsewhere, we expect its BPO business volume to stablise, before recovering in 2HCY18. However, the higher 2HFY18 pretax profit would be offset by normalisation of tax rate to >20% (from 10% in 1HFY18).

BUY on Weakness: High ROE Business Model, Good Track Record

We reiterate our BUY rating on Scicom with a higher target price of RM2.93 (from RM2.54) based on 20x FY19E PER (from 20x CY18E PER). We like Scicom for its expertise in the e-government services / e-solution segment, high ROE business model (42% in FY17), FY17-20E earnings CAGR of 10%, strong balance sheet (net cash) and attractive valuation of 13x FY19E PER / 5% dividend yield. The Cambodia Tourism project is a major earnings catalyst.

Source: Affin Hwang Research - 8 Mar 2018