• MYR1.56 FV based on 15x CY23F P/E. Recent recovery in earnings margin is expected to persist in the near-term, in tandem with strong growth of customer service and wide advancements in digital services. Scicom’s gov-tech business is expected to benefit from an increase in China students’ applications to study in Malaysia. The company also has uninterrupted profits since its IPO, and a high ROE business (c.30% in FY23F). It has a forecasted FY23 dividend yield of c.7.5%, coupled with an ex-cash P/E of merely c.9x, to make it a compelling investment.

• Scalable operating model. Scicom’s diversified client-base creates a natural hedge against the unpredictability of the industry’s growth and cycle. Maintaining in-house IP and developed solutions enable the group to be independent and cost-effective without relying on third-party software suppliers. Scicom has upped its game by providing higher-value operation services or omnichannel solutions, rather than the conventional customer care services. This has shown to improve its earnings margin. It provides multi-lingual channels to solve complex customer issues on time and hence, ensuring customer satisfaction. These value-adds can be difficult and costly for businesses to replicate and hence enhance client stickiness.

• Benefit from geopolitical tension. Reasonable pricing, coupled with vast experience (>20 years), provide the company with a firm footing to compete in both the local and foreign markets. Recent global geopolitical tension has opened up more opportunities for Asia’s business process outsourcing (BPO) players to capture a larger market share in developed countries.

• China border reopening a boon for gov-tech. Scicom provides back-end solutions for the Malaysian Government’s one-stop visa centre for foreign students under the Education Malaysia Global Services (EMGS) programme. This segment contributed c.25% of Scicom’s FY22 sales. The Government continues efforts to attract international students from the region with a 3-year CAGR target of 71%. China has consistently been the largest tertiary education market for EMGS (>40% of students pa), and is set to recover strongly after the country’s borders reopened.

• Undemanding valuation. Coupled with its net cash position and uninterrupted profitability since 2006, we believe its current valuation of c.12x P/E is undemanding vs its direct peer – Teleperformance (TLPFF US, Not Rated) – now trading at c.23x of trailing P/E, especially with Scicom’s higher profit margins and healthier balance sheet. In line with the average 2-year forward P/E of local software space, we ascribe a P/E of 15x on its CY23F earnings to derive a fair value of MYR1.56. A decent dividend yield of more than 7% is another plus point. Key risks include: i) The inability to secure new contracts; ii) non-renewal of EMGS concession; iii) a drop in the number of foreign students studying in Malaysia; and iv) scarce human capital & limited brand presence.

Source: RHB Research - 2 Mar 2023