Scicom reported a disappointing set of results – 2QFY19 core net profit grew by 25% qoq to RM6.3m on higher BPO revenue and lower tax, but still fell short of our expectations due to a decline in ESolutions revenue. The group’s 6M19 core net profit of RM11.2m (- 47% yoy) only accounts for 35-36% of the street and our full year earnings forecasts. We cut our FY19-21E EPS forecasts by 14-15%, incorporating weaker earnings from E-Solutions service, lower EBITDA margin and downgrade Scicom to HOLD (from Buy) with a lower TP of RM1.20 based on 13.5x CY19E PER.

Sequentially Higher 2QFY19 Core Net Profit (+25% Qoq)

Scicom’s 2QFY19 core net profit grew by 25% qoq to RM6.3m on higher contributions from the Business Process Outsourcing (BPO) segment, which more than offset lower earnings from the E-Solutions business. BPO revenue has increased in 2QFY19 driven by improving headcount at consumer electronics and ecommerce clients, which more than offset lower E-solutions revenue where the number of applications processed has normalised against a high base (pent-up demand post GE14 has resulted to a surge in number of applications processed during 1QFY19). Notwithstanding the sequential earnings growth, Scicom declared a lower than expected 1.5 sen interim dividend for 2QFY19 (2 sen in 1QFY19).

6MFY19 Core Net Profit Fell by 47%, Below Expectations

Scicom’s 6MFY19 revenue slipped by 11.8% yoy due to lower contribution from both BPO and E-Solutions businesses. Against a stable operating cost base (RM61.5m, -1% yoy), the lower revenue has resulted in a 8.6ppt dip in EBITDA margin to 21.5%, leading to lower pretax profit of RM14.2m (-39% yoy). A higher effective tax rate had further weakened Scicom’s 6MFY19 earnings. Overall, the results were below market and our expectations due to lower revenue and weaker margins – 6MFY19 core net profit only account for 35-36% of the street and our full year forecasts.

Cutting FY19-21E EPS by 14-15%, Downgrade to HOLD

We cut our FY19-21E EPS forecasts by 14-15% after incorporating lower revenue from E-Solutions segment and weaker profit margin. In tandem, we lower our TP to RM1.20 (from RM1.40) based on an unchanged 13.5x CY19E PER. Downgrade to HOLD. Key upside risks: securing major ESolutions contract(s). Downside risks: cancellation of the Cambodian tourism project and weak revenue from BPO / E-Solutions segments.

Source: Affin Hwang Research - 27 Feb 2019