INVESTMENT HIGHLIGHTS

• BPO segment dragged down margins in 3QFY19

• EGMS segment should show slight improvement gradually

• Forward PER valuation of 12.5x looks appealing and is supported by an attractive dividend yield of 7.5%

• Upgrade to BUY with and unchanged TP of RM0.96

We attended Scicom’s analyst briefing following the release of its 3QFY19 results. The key takeaways and our analysis as follow:

BPO segment dragged down margins in 3QFY19. We understand that the low profit margin for the quarter can be attributed to the higher contribution percentage of the business processes outsourcing (BPO) segment, which typically register lower profit margin compared to the e-solutions division. The lower than usual margin can also be attributed to higher start-up costs for some of its new projects that incorporate more artificial intelligence features that enable functions such as chat-bots. We expect margins for the BPO segment to normalise in the upcoming quarters as operational efficiency improves.

EGMS segment may not recover to previous high levels but should show slight improvement gradually. We believe that the Education Malaysia Global Services (EMGS) segment is still experiencing the negative impact from the massive shutdown of certain learning institutions previously but there should be a gradual recovery over time as the number of genuine foreign students looking to studying in Malaysia should improve alongside the expansion of the country’s education industry. Among others, the government targets 250,000 international students by 2025 compared to 172,886 in 2016.

Forward PER valuation of 12.5x looks appealing and is supported by an attractive dividend yield of 7.5%. Following the price retracement, we believe that Scicom’s current price is looking more attractive. The forward 12.5x PER is also close to 2 standard deviations below its 2 year mean.

Upgrade to BUY as forward PER of 12.5x is deemed appealing. We make no changes to our earnings estimates and target price. Our TP of RM0.96 is based on 15.0x FY20F EPS of 6.41 sen. Moreover, we have not taken into consideration of any new sizeable project wins. Our BUY recommendation is supported by Scicom’s net cash of RM40.6m and dividend yield that is estimated at 7.5%.

Source: MIDF Research - 28 May 2019