Scicom reported a strong set of results – 1QFY20 core net profit grew by 33% yoy/+45% qoq to RM6.6m on higher revenue from both the ESolutions and BPO segments. Notably, the 1Q20 core net profit was its highest quarterly earnings since 3QFY18. We have raised our FY20-22 EPS forecasts by 4-7% to reflect the improved business outlook. We upgrade Scicom to BUY (from HOLD) with a higher 12-month price target of RM1.30 based on a 18.5x CY20E PER (in line with its 6-year average). Key re-rating catalysts: securing new e-services projects, and a sustained earnings recovery.
Scicom delivered a strong set of results – 1QFY20 core net profit grew by 33% yoy to RM6.6m on the back of a higher revenue (+24% yoy) and an improved EBITDA margin, driven by higher contributions from both the E-Solutions and Business Process Outsourcing (BPO) businesses. Scicom adopted MFRS 16 (Lease) in FY20, which lifted its EBITDA margin, depreciation and finance expenses, but the net impact was minimal. All in, the results were above street and our expectations. Scicom’s 1Q20 core net profit accounts for 28-29% of the street’s and our full-year earnings forecasts. The earnings beat was mainly due to stronger-than-expected earnings from the E-Solutions segment, driven by a recovery in the numbers of student visa application processed.
Scicom’s 1Q20 core net profit grew by 45% yoy to RM6.6m on: (i) seasonally higher revenue from the E-Solutions segment; (ii) a stronger EBITDA margin due higher revenue from the high-margin E-Solutions business; and (iii) a lower effective tax rate of 30.8% (from 36% in 4Q19). The earnings improvement led to a higher interim dividend of 1.5 sen per share (4Q19: 1.0 sen per share).
We have raised our FY20-22 core EPS forecasts by 4-7% after incorporating: (i) a higher revenue contribution from the E-Solutions segment, driven by an increase in the number of applications processed; (ii) a higher EBITDA margin, tracking the revenue growth in the high-margin E-Solution business; and (iii) the accounting impact of MFRS16.
We upgrade Scicom to BUY with a higher price target of RM1.30 (from RM0.91) based on an 18.5x CY20E PER (from 13x). We now peg our valuation multiple to its 6-year average (from -1 standard deviation) to reflect Scicom’s strong earnings recovery, the re-rating in valuation multiples across the e-services segment, as well as the active tender market for e-government services contracts. At a 15x CY20E PER, Scicom’s valuation looks attractive. Key downside risk: weak revenue from BPO / E-Solutions segments.
Source: Affin Hwang Research - 26 Nov 2019
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