INVESTMENT HIGHLIGHTS

• BPO provider with wide customer base

• Good track record and attractive dividend yield

• Value emerging as market started to price in tax impact

• Initiate with BUY and TP of RM2.36

Business Overview:

Scicom (MSC) Bhd provides business process outsourcing (BPO) to various corporations as well as the back end solution to the Government’s one-stop visa center for foreign students known as Education Malaysia Global Services (EMGS). Its serves end customers from 86 countries and derives 70% of its sales out of Malaysia.

Investment Theses:

1. BPO provider with wide customer base. Scicom was set up in 1997 as a call centre and has over the years evolved to be the one of the largest BPO companies in Malaysia and Sri Lanka. It hires 2800 staff to serve about 50 customers from different countries. Its diverse customer base includes companies from the gaming, aviation, telecommunication and consumer industries.

2. Good track record. Scicom has not made any losses prior to and since listing. Its FY13-FY17 revenue CAGR was 10% and 32% for net profit. From FY14 onwards, the company has included a new stream of income from the provision of back-end solution to EMGS, which is under a multi-year concession, which has started since 2013.

3. Attractive dividend yield at 4.8%. Although without a formal dividend policy, Scicom has been generous with its dividend payout. The company has paid out more than 70% of its profits since FY14. We expect similar payout ratios going forward, which translates into an attractive yield of 4.8% for FY18F and FY19F.

4. Value emerging as market started to price in tax impact. Scicom’s share price has fallen from a high of RM2.40 to RM1.83 recently as investors anticipate normalised corporate tax rates upon expiry of its MSC status, which will impact its bottomline starting from 2QFY18. That said, we think that the higher tax rate has been priced in with the 18% decline in share price since June.

Initiate with BUY and TP of RM2.36. Our TP is derived from 18.3x price-to-earnings (P/E) of FY19F EPS of 12.89 sen. The 18.3x ascribed is based on Scicom’s 4-year mean P/E, which has since incorporated income from the e-government segment.

Source: MIDF Research - 31 Oct 2017