Weak Local Earnings, Positive Overseas Outlook

Scicom reported a weak set of results – 9MFY18 core net profit fell by 13% to RM29m, tracking a 16% decline in revenue. The results were below market and our expectations due to lower revenue from both the BPO and EMGS businesses. Despite the weaker earnings, management has declared a quarterly DPS of 2 sen (3Q17: 2 sen). We cut our FY18- 20E EPS by 8-15% and lowered our price target to RM2.68, based on an unchanged 20x FY19E PER. Maintain BUY. We continue to like Scicom for its expertise in the e-government services segment, high ROE business model and compelling valuation of 15x FY19E PER / 4.7% yield.

9MFY18 Core Net Profit Fell by 13%, Below Expectations

Scicom’s 9MFY18 core net profit slipped by 13% yoy to RM29m on lower profit contribution from both the Business Process Outsourcing (BPO) and Education Malaysia Global Services (EMGS) businesses. The BPO revenue was affected by lower activities (in particular, we observed a sharp revenue decline of 39% from its Philippines clients) while EMGS revenue was affected by a reduction in the numbers of foreign students in Malaysia. All in, the results were below both consensus and our expectations – 9M18 profit accounts for 69% of the street and our full year forecasts. Nonetheless, Scicom declared 2 sen dividend for 3Q18, as expected.

Sequentially, Core Net Profit Was 29% Weaker

Sequentially, Scicom’s 3QFY18 core net profit fell by 29% to RM7.2m on lower revenue (-10% qoq) and weaker EBITDA margin of 25% (from 31%). The sequential decline in revenue was predominantly attributable to lower billings from its Philippines BPO client(s).

On Track to Start the Cambodian Tourism Project in 3QCY18

Scicom is on track to launch the Cambodia Tourism Management System in 3QCY18. The Cambodian Tourism project gives Scicom an exposure to Cambodia’s vibrant tourism sector. Upon implementation, we forecast the project to contribute to 25-29% of Scicom’s FY19-20E earnings.

Trimming FY18-20E EPS by 8-15%

We cut our FY18-20E EPS forecasts by 8-15%, factoring lower revenue from both the BPO and EMGS segments. In view of the recent changes in Malaysia’s political landscape, we expect some of Scicom’s prospective foreign BPO clients to temporarily hold back their work orders.

Source: Affin Hwang Research - 22 May 2018