INVESTMENT HIGHLIGHTS

• FY18 earnings missed expectations

• Net profit fell 29%yoy to RM32.2m

• New projects from MNC customers expected to be carried forward to 1HFY19

• Maintain BUY with unchanged TP of RM2.29

FY18 earnings missed expectations. Scicom’s full year net profit of RM32.2m fell short of expectations, making up only 88% of our full year estimate and 89% of consensus’. The negative deviation is caused by delay in the implementation of its business processes outsourcing (BPO) projects An interim dividend of 3.0 sen was announced, bringing full year DPS to 9.0 sen, which is within expectation.

Net profit fell 29%yoy to RM32.2m mainly due to revenue that declined by 17.1% to RM165.3m, unrealised forex losses amounting to RM1.2m and the absence of tax holiday, which brought its full year tax rate to 14%. Revenue fell short as a result of the slowdown in the Education Malaysia Global System (EMGS) segment and a delay in the implementation of its BPO projects.

4QFY18 net profit dropped by 59%yoy to RM4.1m as revenue slid by 20%yoy to RM37.6m. The underwhelming results are attributable to the slow-than-expected recovery in its EMGS segment as well as the delay in new projects from its BPO segment. On top of that, it incurred higher taxes during the quarter as the tax holiday period had ended.

New projects from MNC customers expected to be carried forward to 1HFY19. We expect the delayed projects from the BPO segment to start in FY19. This is partially attributed to the pre-election uncertainties in 4Q. Since the GE14 has concluded, we expect its businesses to recover in the coming quarters. The company is also exploring other contracts and more jobs from existing and new customers. We opine new wins should not be an issue given Scicom’s track record and capabilities. On top of that, we expect its EMGS segment to recover gradually.

Maintain BUY with unchanged TP of RM2.29 based on 18.3x PER on FY19 EPS of 12.5 sen. Although FY18 net profit came below expectations, we believe a ramp up in jobs could take place in 1HFY19. It is in a net cash position of RM52.3m as of end June. 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 estimated at 4.7%.

Source: MIDF Research - 28 Aug 2018