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Sunday, June 19, 2016

Scicom (MSC) Berhad - Stable But Growing

Scicom (MSC) Berhad - Stable But Growing
Author: PublicInvest | Publish date: Fri, 17 Jun 2016, 09:38 AM

Various industry forecasts are suggesting that the global business process outsourcing (BPO) market could grow by 6-9% over the period of 2013-2020, with a projected market size of US$220bn by 2020. Meanwhile, Malaysia’s ranking as a major outsourcing destination has improved from 32nd in 2007 to 18th in 2014. As the largest BPO player in Malaysia, Scicom should benefit from this global trend. The company has chalked a 5-year earnings CAGR of 33% and has been profitable since its inception in 1997. Coupled with its clean balance sheet, we think there is still room for dividend payout to increase from current ratio of c.80% (3.4% dividend yield). We value the stock at RM2.68 based on 20x FY17F EPS, which translates to a PEG of 1.3x. Its US peers are trading at lower PE multiple of 17x but their earnings growth potential is also lower at an average of 9%. Meanwhile, Malaysia’s e-government service providers are valued at an average PER of 23x 2017 earnings.

Largest outsourcing company in Malaysia. Scicom was first listed on Mesdaq in 2005 before it was transferred to the Main Board in 2009. It is a global outsourcing company specializing on customer relationship management. Since inception, the company has remained profitable and has diversified from a pure outsourcing company to a consultancy and e-commerce solutions provider. Currently, Scicom is supporting customers from over 37 countries in 30 languages from its call centres in Kuala Lumpur and Colombo, and derives 70% of its revenue from outside Malaysia. For e-government services, Scicom is the sole service provider appointed by the Ministry of Education to process foreign student visas via the Education Malaysia Global Services (EMGS). The portal was developed by Scicom, complementing the government’s objective to make Malaysia a regional education hub and achieve foreign student enrolment of at least 200,000 by 2020 from 100,000 currently.

Strong balance sheet and room for higher dividend. Scicom’s business model requires limited capex as it is mainly driven by human capital and software systems. As a result, the company has zero borrowing and has been sitting on a net cash position (RM36.6m @ 31 March 2016). It also pays an attractive payout of about 80%, though we believe there is still room for higher dividend payment given the strong earnings growth and low capex requirement.

Scalable business model to drive earnings growth. Malaysia has been gradually moving up the ranks as one of the major outsourcing destinations due to its ability to offer multi-lingual customer care and support services. Scicom’s business is easily scalable and replicated across various sectors, judging from its diversified pool of customers. We believe Scicom’s growth potential will be driven by the need for MNCs and government entities to lower costs and increase efficiency through the convergence of social network and mobility platforms.

Source: PublicInvest Research - 17 Jun 2016

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