Scicom reported a disappointing set of results – 1QFY19 core net profit fell by 7% qoq to RM5m due to lower EBITDA margin, while the 2.7% qoq revenue growth was below our expectations. Elsewhere, Scicom’s Cambodian Tourism project is on schedule to be commissioned by end-2018. However, the discussions on utilisation of tourism development fund is still ongoing and we expect Scicom to only realise the full project earnings potential in FY20E. All in, we cut our FY19-21E EPS forecasts by 21-29%, incorporating weaker earnings from the BPO and Cambodian tourism project and downgrade Scicom to HOLD (from BUY) with a lower TP of RM1.80 based on 17.5x CY19E PER. The group’s high ROE / asset light business model, robust balance sheet and yield of 5.3% should cushion the earnings disappointment.

1Q19 Core Net Profit Slipped by 7% Qoq, Below Expectations

Scicom’s 1Q19 core net profit slipped by 7% qoq to RM5m due to lower contributions from the Business Process Outsourcing (BPO) segment and higher overheads / upfront costs for the Cambodian Tourism project, partly cushioned by higher earnings from the E-Solutions segment. BPO revenue had declined unexpectedly in 1Q19 due to lower ad-hoc projects and lower activities from a main client. While the E-solutions segment delivered higher profit driven by higher number of applications processed (+38% qoq), the increase was not sufficient to offset the weakness elsewhere. All in, the results were below market and our expectations – 1Q19 core earnings only account for 11% of street and our full year earnings forecasts. The earnings miss was due to weak BPO revenue and low overall EBITDA margin.

Steep EPS Decline (-55% Yoy) But DPS Stayed Unchanged at 2.0 Sen

Compared to 1Q18, Scicom’s core net profit fell by a steep 55% yoy due to lower revenue (-16% yoy), weaker EBITDA margin (-8.8 ppt to 20.6%) and normalisation of tax rate to 24.6% (from 7.5%). Notwithstanding the steep earnings decline, Scicom maintained its 1Q19 DPS of 2.0 sen.

Cambodian tourism project should be commissioned by end-2018 but revenue (to Scicom) may only kick in later

We understand that the Cambodian Tourism Management System is on scheduled to be launched by end-2018. However, discussions on the utilisation of the tourist development fund is still ongoing. As such, we believe that Scicom may only realise the full revenue potential starting FY20.

Cutting FY19-21E EPS by 21-29%

We cut our FY19-21E EPS forecasts by 21-29% after incorporating: (i) lower revenue / profit contributions from the BPO business. The BPO business activities did not recover as fast as our earlier expectations; (ii) a delay in the recognition of earnings from Cambodia Tourism Project to 3QCY19 (from 4QCY18), at lower revenue / profit; and (iii) weaker profit from the E-Solutions segment, taking a cue from the weak results and after updating our earnings model based on disclosures in Scicom’s Annual Report 2018.

Downgrade to HOLD With a Lower TP of RM1.80

We downgrade Scicom to HOLD (from Buy) with a lower 12-month price target of RM1.80 (from RM2.76) based on a lower 17.5x CY19E PER (from 20x). We now peg our target PER multiple to its 5-year historical average (from +1 standard deviation).

At its current valuation of 16.5x CY19E PER / 5.3% yield, Scicom’s valuation looks fair. The soft immediate earnings outlook (lacklustre BPO segment, timing uncertainty in Cambodian project) is balanced by good long-term business prospects (expertise in E-Solutions segment), and supported by its strong balance sheet (RM51m net cash) and 5.3% yield. Key upside risks: robust recovery in BPO activities, strong contributions from Cambodian project and securing major E-Solutions contract(s). Downside risks: further delays / renegotiation of the Cambodian tourism project and weaker than expected revenue from BPO / E-Solutions segments.

Source: Affin Hwang Research - 23 Nov 2018