Investment Merits

• Market-leading position

• Scalable operating model

• China border reopening a boon for gov-tech

• Healthy balance sheet with strong track record of dividend payment

Company Profile

Scicom is an industry leader in business process outsourcing (BPO)  services and integrated digital solutions. It offers innovative digital  services in the areas of customer lifecycle management, digital, and  govtech. The company also provides education services, including  corporate and youth training programmes. It has operations in many  countries, including Malaysia, Singapore, China, the Philippines,  Thailand, Hong Kong, the UK, Indonesia, India, Cambodia, and Sri  Lanka.

Highlights

Diversified customers base.Scicom serves over 40 customers from  multiple industries, including telecommunication, hospitality, airlines, ecommerce, education, and E&E. As it does not depend on a single  industry or customer, the client-base diversity creates a natural hedge  for the company. Having its own IP and in-house developed solutions  allow it to be independent and cost-effective without relying on any  third-party software supplier.

Moving up the value chain.The company moved up the value chain  by creating new customer offerings. It started providing higher-value  operations services (such as social media support, text support,  fulfilment, and robotic automation) to move away from the conventional  customer care offerings. The updates are believed to influence the  higher earnings margin. With its wider range of services, Scicom is  seen as delivering one-stop digital business operations to its clients.

Asian edge. Scicom’s multi-lingual advantage, reasonable pricing, and  experience gained from operating for more than two decades, provide it  a firm position in the Asian market and an upper-hand over regional  competitors with higher costs. Recent geopolitical tensions have also  created more opportunities for Asian BPO players to capture a larger  global market share as businesses seek affordable alternatives to the  European providers (Scicom’s main competitors).

Welcoming foreign students. 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 is continuing in its 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 (over  40% of students pa), and is set to recover strongly after the country’s  borders reopened.

Strong track record of dividend payment. While Scicom does not  have a dividend policy, it has consistently paid dividends every year  since its IPO. In the past four years, its dividend payout ratio has ranged  from 79-97%.

Company Report Card

Results highlights.1HFY23 (Jun) revenue remain almost unchanged  YoY, as the lower transactional volumes in BPO was offset by new  projects secured and the increase in the education segment. Core profit  increased marginally by 0.1% mainly due to higher operating profit from  incremental revenue from an existing project. 

Strong net cash position.The group has a healthy balance sheet with  zero borrowings and net cash of MYR43.8m or MYR0.12 per share as  at 2QFY23. We expect the company to stay in a net cash position for  FY23F-24F.

ROE. Over the past three years, its ROE ranged between 22% and  28%. With the expected lift in FY23F-24F earnings, the company’s ROE  should also increase gradually

Dividends. The group has also consistently paid dividends every year  since its IPO. In the past four years, Scicom’s dividend payout ratio  ranged between 79% and 97%. We expect it to continue paying  dividend of at least 75% of its PATAMI going forward, which translates  to over 7% of dividend yield.

Management. Scicom is helmed by CEO Dato’ Sri Leo Suresh  Ariyanayakam who is responsible for overseeing the overall operational  function of the group. Kelvin Loke Cheong Hian, the CFO, has over 20  years of accounting experience. They are supported by the senior  management team, comprising individuals with outstanding professional  qualifications and over 10 years of experience in their respective fields.

Investment Case

Fair value of MYR1.40-1.60. We like the stock for its market leading  position in the industry. Scicom’s BPO business will benefit from strong  growth of customer service and wide advancement in digital services,  while its govtech business is expected to benefit from an increase in  China student applications to study in Malaysia. Based on an ascribed  P/E of 14-15x on 2023F earnings, we derive a fair value range of  MYR1.40-1.60. We believe that our valuation is fair given it is still at a  discount to the local software players’ 2-year forward P/E of 15x. Our  ascribed P/E of 14-15x is also way below peer Teleperformance’s 12- month trailing P/E of 23x. A decent dividend yield of c.7% is another  plus point.

Key risks include the inability to secure new contracts, non-renewal of  EMGS concession, a drop in the number of foreign students studying in  Malaysia, human capital scarcity, and limited brand presence.

Source: RHB Securities Research - 16 May 2023