Scicom reported a lacklustre set of results – 4QFY19 core net profit slipped by 2% qoq to RM4.6m due to higher effective tax rate of 36% (vs 26% in 3Q), which more than whipped out the sequential gains in pretax profit driven by a higher revenue. Overall, the results were below market and our expectations largely due to the higher-than-expected tax rate in 4Q, as well as slow recovery in the E-Solution business. Notwithstanding the 4Q19 earnings disappointment, we maintain the key assumptions in our FY20-21E financial projections, expect the BPO and E-Solutions revenue to pick up modestly in FY20E on higher transaction volume. Maintain HOLD. We tweaked our FY20-21E EPS forecasts and TP by 1-2% after incorporating the full year financial statement.

Higher 4QFY19 pretax profit but the bottom line was hit by high taxation

Against a low base, Scicom’s 4QFY19 core pretax profit grew by 20% qoq to RM7.2m (-4.5% yoy) on higher contributions from the Business Process Outsourcing (BPO) business and stable earnings from the E-Solutions segment. The group’s core net profit had however slipped by 2% qoq to RM4.6m due to a high effective tax rate of 36% (versus 26% in 3Q19). Management has declared an interim dividend of 1 sen (3Q19: 1 sen).

FY19 Core Net Profit Fell by 40% Yoy, Below Expectations

Scicom’s FY19 core net profit fell by 40% yoy to RM20.5m due to lower profit contribution from the E-Solutions segment and normalisation in the effective tax rate (26% in FY19, versus 14% in FY18), partly cushioned by higher BPO earnings. In tandem, Scicom has declared lower dividend in FY19 (5.5 sen, versus 9.0 sen in FY18). Overall, the results were below market and our expectations due to the higher-than-expected tax rate in 4Q19 and slower-thanexpected recovery in the E-solutions business – FY19 core net profit accounted for only 93% of the street’s and 91% of our full-year earnings forecasts.

Trimming EPS by 1-2% After Updating the Full Year Financial Statement

We maintain the key assumptions (transaction volume, average transaction price, profit margins) in our financial models but trimmed our EPS by 1-2% after updating Scicom’s full year financial statement. Notwithstanding the earnings blip in 4Q19, we expect the effective tax rate to normalise to 24-25% and transaction volume for E-Solutions business to pick up in FY20-21E. In tandem, we have revised our 12-month price target to RM0.91 (from RM0.92) based on an unchanged 13.5x CY20E PER.

Maintain HOLD

We maintain our HOLD rating on Scicom. At a 13x CY20E PER, Scicom is trading close to -1SD from its 5-year average, which looks fair considering its subdued earnings outlook and choppy earnings delivery in recent quarters. Key upside risk: securing major E-Solutions contract(s). Key downside risk: weak revenue from BPO / E-Solutions segments.

Source: Affin Hwang Research - 29 Aug 2019