INVESTMENT HIGHLIGHTS

• FY19 earnings within expectation

• FY19 CNI fell by 38.7%yoy to RM20.5m

• Participation in government tenders

• Maintain NEUTRAL with an unchanged TP of RM0.96

FY19 earnings within expectation. Scicom’s full year core net income (CNI) of RM20.5m met our estimates at 97% and 93%of consensus’. The company has announced an interim dividend of 1.0sen, bringing ytd DPS to 5.5sen, which is also in-line with our forecast.

FY19 CNI fell by 38.7%yoy to RM20.5m as revenue dipped 2.5%yoy to RM161.2m. CNI declined steeper than the drop in revenue mainly due to the lower number applications processed under the Education Malaysia Global Services (EMGS) segment, which in turn affected its margins. PBT margin for FY19 was down by 4.9ppt to 17.5% compared to a year ago. The lower profitability for FY19 can also be attributed to higher effective tax rate of 26%, which is higher than the usual 24% corporate tax rate, and was mainly due to the under provision of taxation in the previous quarters.

4QFY19 earnings decreased by 9.3%yoy to RM4.5m as revenue climbed 12%yoy to RM42.2m mainly from the shift in income components. During the latest quarter, the revenue from the business process outsourcing (BPO) segment is higher, dragging down its overall PBT margin. During the year, the company has increased its BPO business client base by 22% compared to a year ago.

Participation in local and international government tenders. The company is taking part in several tenders from both local and international government projects through its Gov-tech division. Locally, the company is taking part in the tendering process of the Integrated Immigration System (IIS). We understand that this is a multi-stage tendering process and the details of the project are still sketchy while the outcome may be fluid. Other overseas projects involve e-solutions provision related to immigration and security services for some developing countries. We have not factored in any project wins at this juncture as it may take time from the point of the project award to the implementation and monetisation of the business win.

BPO business may continue to take the lead for now. We expect the BPO segment to be the main income driver in the nearterm as recovery in the EMGS segment may take time. Moreover, litigation process with EMGS is still on-going.

Maintain NEUTRAL with an unchanged TP of RM0.96 as 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. We maintain our NEUTRAL recommendation on the stock as on-year earnings growth is unexciting without a new sizeable project win. Downside risk will be an unfavourable outcome from the litigation filed by EMGS. Dividend yield is estimated at 6.8%.

Source: MIDF Research - 29 Aug 2019