Investment Highlights

• 1QFY18 earnings within expectation

• Net profit declined 8.7%yoy to RM10.97m

• Tax rate likely to normalise starting 2Q18

• Maintain BUY with unchanged TP of RM2.36

1QFY18 earnings are within expectation, making up 27% of ours and 25% of consensus’ estimates. Scicom’s revenue of RM45.8m is also in-line with our full year forecast, coming in at 22%. An interim dividend of 2.0 sen per share was declared, which is also in-line with our full year expectation of 9.0 sen.

Net profit declined by 8.7%yoy to RM10.97m due to an 11.9% drop in revenue, which in turn is a result of lower billable transaction for some of its projects. The occurrence is attributable to change in clients’ requirements and strategies. Looking ahead, we expect a healthy pipeline of outsourcing projects, which will provide visibility for its full year sales. It is also actively pursuing contracts worth RM105m through tender for the BPO business. On the other hand, Scicom is taking proactive measures to control its operation cost, which we expect to mitigate the absence of zero-tax in the coming quarters.

Compared to the preceding quarter, net profit increased by 11.2% although revenue slipped by 2.7% due to better operational efficiency. Revenue from outsourcing projects fell by RM5.1m but adhoc projects totalling RM3.4m has cushioned the impact. Meanwhile, its cash pile grew to RM42.6m from RM37.1m compared to the quarter prior.

Tax rate likely to normalise starting 2Q18 the tax holiday has ended in early November 2017. We expect taxes to normalise to 24% in the coming quarters compared to almost zero in the quarter under review. This will impact its PAT margin but we do not expect huge changes for its PBT margin. We have already factored in higher taxes in our full year forecast.

Forecasts maintained. We make no changes to our earnings estimates as the latest results came within expectation.

Maintain BUY with unchanged TP of RM2.36. We keep our BUY call and target price as Scicom’s results are in-line with our full year forecast. Our TP of RM2.36 is derived from 18.3x price-to-earnings (P/E) of FY19F EPS of 12.91 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. Dividend yield is expected at 4.8%, which is considerably attractive.

Source: MIDF Research - 14 Nov 2017