Scicom reported a decent set of results – 6MFY20 core net profit grew by 19% yoy to RM13.4m on higher revenue from both the BPO and E-Solution businesses. Sequentially, the 2QFY20 core net profit grew by 2% to RM6.8m and management has maintained its quarterly dividend of 1.5 sen (6MFY20: 3.0 sen). The results were largely within the street and our expectations. Nonetheless, we cut our FY20-21E EPS forecasts by 3-4% to incorporate lower transactions volume due to the business disruption by the Covid-19 outbreak. In tandem, we lower our price target to RM1.26 (from RM1.30) based on a target PE multiple of 18.5x (in line with its 6-year average). Key re-rating catalysts: securing new e-services projects, and a sustained earnings recovery.

6MFY20 Core Profit Grew by 19% Yoy to RM13.4m, Within Expectations

Scicom delivered a decent set of results – 6MFY20 core net profit grew by 19% yoy to RM6.8m on the back of higher revenue (+20% yoy). Also, Scicom’s 6MFY20 EBITDA margin grew by 7.2ppt to 28.7% due to the adoption of MFRS 16 (Lease) in FY20 and the strong revenue growth which outpaced its operating cost increases. Adjusting for the MFRS16 impact, Scicom’s 6MFY20 adjusted EBITDA margin of 23.3% was still a notable increase from 21.5% in 6MFY19. Overall, the results were within street and our expectations - Scicom’s 6MFY20 core profit accounts for 55-56% of the street’s and our full-year forecasts.

Sequentially, Earnings Grew by 2% on Lower Costs

Notwithstanding lower 2QFY20 revenue (-4.8% qoq), Scicom’s 2QFY20 core net profit grew by 1.8% qoq to RM6.8m on lower operating costs and a dip in its depreciation expenses. We note that 1QFY20 was a seasonally stronger quarter for the E-Solutions segment and hence, the sequential decline in revenue was broadly expected.

Trimming FY20-21E EPS Forecasts by 3-4%, Maintain BUY

In spite of the stellar 6MFY20 earnings, we have trimmed our FY20-21E earnings forecasts by 3-4% after incorporating lower business volume growth (both BPO and E-Solution segments) due to the disruption from the Covid-19 outbreak. In tandem, we lowered our 12-month price target to RM1.26 (from RM1.30) based on an unchanged 18.5x CY20E PER. Maintain BUY. At a 15.9x FY20E PER, Scicom’s valuation looks attractive, considering its strong earnings recovery, the re-rating in valuation multiples across the e-services segment, as well as the active tender market for e-government service contracts. Key downside risk: weak revenue from BPO / E-Solutions segments.

Source: Affin Hwang Research - 24 Feb 2020