INVESTMENT HIGHLIGHTS

• 1HFY19 disappointed

• Core earnings for the first half fell 50.4% yoy to RM11.1m

• Second half expected to be better

• Maintain NEUTRAL with an adjusted TP of RM1.37 (previously RM1.77)

1HFY19 disappointed as its core net profit of RM11.1m makes up only 32.2% of ours and 34.2% of consensus’ expectations. The negative deviation slower than expected job replenishment and softer than expected growth in its e-solutions segment. It announced an interim dividend of 1.5 sen, bringing total DPS to 3.5 sen to-date.

Core earnings for the first half fell 50.4%yoy to RM11.1m as revenue slid 11.8% to RM78.4myoy. The decline is mainly due to the softer on-year performance at its e-solutions segment, which is partially buffered by a slight improvement at its business process outsourcing (BPO) segment. On the other hand, some of the projects that the company pursue have not been implemented.

2QFY19 core net profit decreased by 46.0%yoy to RM6.15m on the back of revenue that dipped 7.7%yoy to RM39.7m. The lower revenue can be attributed to a change in strategy by one of its Chinabased BPO customers. The revision has also resulted in lower operational efficiency that led to lower profitability. Topping that, the lower number of foreign student application processed under its Education Malaysia Global Services (EMGS) compared to last year had also cause its EBIT margin to decline. Recall that the government has clamped down tertiary education institutions that didn’t meet requirements. As a results, there are fewer applications from foreign students. Sequentially, Scicom’s core net profit jumped by 24.4% while revenue increased by 2.7% compared to 1QFY19 due to the addition of new BPO projects in 2QFY19 that cushioned the soft EMGS segment.

Second half expected to be better. We expect a sizeable BPO project to start in 2HFY19. In addition, the new BPO projects in 2QFY19 should continue contribution in the coming quarters and some of its clients may even increase their requirements. Once the operations stabilise, we expect improvement in its pre-tax margin as the company will be able to plan its resources accordingly. On another note, we understand that the Cambodian tourism project has not been launched.

Source: MIDF Research - 27 Feb 2019