INVESTMENT HIGHLIGHTS

• 1QFY19 missed expectations

• Core earnings for the quarter fell 55.0% yoy

• Cambodia tourism project delayed further

• Downgrade to NEUTRAL (from BUY) with an adjusted TP of RM1.77 (previously RM2.29)

1QFY19 missed expectations as its core net profit of RM4.94m makes up only 11% of ours and consensus’ expectations. The negative deviation is attributed to the further delays in projects for its business process outsourcing (BPO) and e-solutions segments.

Core earnings for the quarter fell 55.0% yoy to RM4.9m mainly due to lower profit margin from its overall business as well as higher tax rate of 24.5% compared to 6.8% in the previous corresponding quarter. Revenue fell by 15.7%yoy due to slower-than-expected job replenishment. The lower number of foreign student applications processed under its Education Malaysia Global Services (EMGS) segment could also attribute to its lower EBIT margin. Recall that the government has clamped down tertiary education institutions that didn’t meet requirements and that resulted in lower number of foreign student application. Qoq, core net profit declined by 18% while revenue increased by 2.7% mainly due to the higher ratio of BPO work compared to e-solutions.

Cambodia tourism project delayed further. The implementation of the Cambodia project, which was first announced in February this year, had been pushed back further from the initial expectation of 1HFY19. We understand that the implementation of the project may be delayed further even though the solution is ready to be rolled out because of some details that have not been ironed out. On top of that, the delay in a sizeable BPO project to 2HFY19 is also expected to affect the company’s performance.

Earnings cut by -22.7%/-12.8% for FY19F and FY20F to RM34.4m and RM43.3m respectively. We have also reduced our revenue expectation by 10.6%/5.9% in FY19F/FY20F to RM190.1m and RM212.9m as we factor in the project delays as well as slower recovery in the EMGS segment.

Downgrade to NEUTRAL (from BUY) with an adjusted TP of RM1.77 (previously RM2.29) because of the adjustment in our earnings estimates. Our TP is derived from 18.3x PER FY19 EPS of 9.68 sen. We believe that Scicom’s near-term outlook will be unexciting due to the further delay in the project implementation. However, the stock is supported by a decent dividend yield of 4.7% and net cash of RM51.4m.

Source: MIDF Research - 23 Nov 2018