Scicom reported a modest set of results – 9MFY20 core net profit grew by 12% yoy to RM17.8m on higher revenue. Sequentially, the 3QFY20 core net profit fell by 34% to RM4.4m due to lower revenue from the E-Solution segment and the recognition of RM203k bad debts. All in, the results were a tad below market and our expectations. We cut our FY20-22E EPS forecasts by 1-8% in anticipation of lower international student visa processed (due to the prolonged MCO / CMCO) and higher tax rate, partly cushion by higher BPO revenue. We downgrade Scicom to a HOLD (from Buy) but raised our price-target to RM0.99 (from RM0.85) after rolling forward our valuation horizon and at a higher target PER multiple of 15.5x (from 13.5x) based on 1 standard deviation below its 5-year average.

9MFY20 Core Profit Grew by 12% Yoy to RM17.8m, Below Expectations
Scicom delivered a modest set of results – 9MFY20 core net profit grew by 12% yoy to RM17.8m on the back of higher revenue (+16.7% yoy), driven by higher contribution from the BPO segment. The group’s 9MFY20 EBITDA margin grew by 6.7ppt to 27.1% 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 9MFY20 adjusted EBITDA margin of 21.4% was slightly above 9MFY19’s 20.4%. Nonetheless, the results were a tad below consensus and our expectations due to higher-than-expected effective tax rate and weakening revenue from the E-Solution segment.

3QFY20 Core EPS Were 34% Due to Lower E-Solution Revenue, Bad Debts
Sequentially, Scicom’s 3QFY20 core net profit fell by 34% to RM4.4m due to lower revenue from the E-Solutions segment (largely due to lower student visa processed) and the recognition of RM203k of bad debts, partly offset by higher revenue / profit from the BPO business. Management declared a 1.0 sen of interim dividend, lower than 1.5 sen in 2QFY20.

Cutting FY20-22E EPS Forecasts by 1-8%, Downgrade to HOLD
We cut our FY20-22E earnings forecasts by 1-8% after incorporating higher BPO revenue and higher tax rate (taking a cue from the 9MFY20 results) but lower business volume for the E-Solution segment due to the prolonged MCO and CMCO period. We downgrade Scicom to HOLD (from Buy) but raised our 12-month price target to RM0.99 (from RM0.85) after rolling forward our valuation horizon to 2021 and raising our target PER multiple to 15.5x (from 13.5x) based on 1 standard deviation below its 5-year average. Key upside risk: winning major E-Solutions contract; downside risk: weak revenue / earnings from BPO / E-Solutions segments

Source: Affin Hwang Research - 1 Jun 2020