Kenanga Research & Investment

Scicom (MSC) Berhad - An Undervalued BPO Play

Publish date: Thu, 17 Aug 2023, 09:35 AM


Scicom generates c.70% of its revenue from its business process outsourcing (BPO) segment which is expected to grow with the intrinsic shift of higher outsourcing demand from businesses looking to improve efficiency and scalability. The group is also poised to benefit from the impending recovery of China students flowing into Malaysia via its Education Malaysia Global Services (EMGS) platform. With a current forward PER of 10x, the share price offers an excellent opportunity to capitalise on Scicom’s expanding established operations while receiving annual 7.9% dividend yield, pending potential catalysts from artificial intelligence (AI) adoption and its proprietary medical tech (MedTech) which is not yet priced in. Furthermore, a potential FV of RM1.70 represents an upside of 58%.

Burgeoning needs for BPO. There is a growing inclination among businesses to outsource routine and standardised functions like customer service to BPO providers. This frees up resources and time for businesses to focus on core and value-added activities such as product development and marketing strategy, thereby ensuring better business scalability. Beyond this organic trend, Malaysia is also a potential beneficiary of trade diversion broadening out to services (previously mostly goods and trades). According to Forbes and Business Today, Malaysia is ranked 3rd best BPO destination in the world. Also, Data Bridge Market Research projects the Asia Pacific BPO market to grow at 8.6% CAGR between 2023 and 2030. These tailwinds are poised to favour Scicom, which generates c.70% of its revenue from BPO services.

Reopening play: Chapter 2. The economy has seen and felt the evident stage-one impact of reopening (i.e. revenge spending and pent-up travel). Having satiated the long-restrained desires, it’s time to face reality – transitioning from remote work to returning to office, and from traveling around the world to resuming work or studies. This leads us to anticipate the stage-two economic impact of reopening – including a return to physical classes versus on-line for the education sector. Interestingly, Scicom is the platform provider for student visa applications under Education Malaysia Global Services (EMGS), which contributes c.30% to its revenue. According to EMGS’ website, new students’ applications in 4QCY22 jumped 12% despite a 14% decline in applications from China (which accounts for about half of student’s applications in Malaysia). With China’s recent full reopening, we foresee resurgence in new applications from 2HCY23 onwards.

AI and MedTech are wild cards. Generative artificial intelligence (Gen AI) has emerged as a vital asset in the digital era, and has the potential to elevate customer experience (CX), enhance employee productivity, and optimise task mix between human and AI. According to IDC, the leading use cases of AI are in sales and customer service functions. These use cases will see investment from nearly every industry and will collectively account for more than a quarter of all AI spending. This therefore is a defining moment for Scicom (which offers outsourced customer services) to explore the feasibility of incorporating AI into its daily operations or service offerings. AI aside, Scicom is also developing its proprietary medical tech (Medtech) platform, creating an e-TPA (third party administrator) to replace traditional methods used in the medical insurance space. This will allow for price transparency, quicker processing time and overall improved efficiency.

Investors are paid 7.9% dividend yearly in the meantime. With a dividend yield of 7.9%, and trading at a PER of 10x, we think the downside is very limited and investors are paid to be part of the momentous inflection point of Scicom.

Added kicker of potential fair value of RM1.70 pegged to a modest FY24F PER of 15x. We assign Scicom a valuation that aligns with global counterparts with higher market capitalization due to its rarity as one of only two BPO firms on Bursa Malaysia. In contrast, Scicom is currently trading at c.30% discount to its nearest domestic competitor, Daythree Digital, which has a current valuation of 22x.

Risks include unexpected cancellation of contracts and failure to extend existing concessions.

Source: Kenanga Research - 17 Aug 2023

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