A review of 1QCY21: Systems Ltd

System Ltd is expected to post 1QCY22 consolidated NPAT of PKR1.1bn (EPS: PKR4.12), up 89% yoy, but down 38% qoq (sequential decline is due to absence of one-off FV adjustment gain booked on subsidiary).

Key expectations behind the strong yoy jump in earnings are:

(i) surge in revenue amid higher influx of orders,

(ii) exchange gains due to PKR devaluation.

SYS can potentially book one-off FV gain on its associate Retailistan, as its fully owned subsidiary Jugnu has raised US$22.5mn in Series A funding on March 26. This may potentially result in positive earnings surprise (non-cash).

Key expectations for 1QCY22 results:

Net sales are expected to rise 75% yoy and 12% qoq to PKR5.3bn. Key expectations are:

(i) greater sales to US and UAE-based clients coupled with presence in new geographies like Europe and Saudi Arabia,

(ii) continued swift addition of new employees coupled with introduction of new services, and

(iii) PKR devaluation of around 8% in the past two quarters.

We expect gross margins to decline by c.5.0ppt yoy, but up 0.9ppt qoq to 30% in 1QCY22. The yoy decline in GMs is majorly due to continuous increase in number of fresh graduates hired in CY21 and 1QCY22, who usually go through extensive training programs (which last about 4-6 months) before adding to revenues.

Other income is expected to clock in at PKR230mn in 1QCY22 vs. PKR269mn in 4QCY21. The qoq decline is majorly due to lower exchange gains to the tune of PKR115mn (c.PKR0.41/sh), due to lower PKR depreciation in 1QCY22 vs. PKR123mn (c.PKR0.45/sh) in 4QCY21.

In other line items:

(i) finance cost is projected to rise by 137% yoy and 10% qoq as short-term borrowings and interest rates have both increased, (ii) distribution expenses will increase substantially by 77% yoy to from PKR136mn in 1QCY21, and (iii) effective tax rate is expected to clock in at 4.5% vs. 3.9% in SPLY.

SYS is likely to post decent earnings in 1Q continue its growth trajectory going forward. This is backed by:

(i) the continued acquisition of new clients coupled with higher orders coming from existing clients,

(ii) introduction of new services and expanding into new geographies; and

(iii) higher software implementation, cloud based and BPO services for international clients.

Additionally, gross margins will ultimately expand beyond c.30% as growth in revenues will be driven mostly by the higher-margin US, Middle East and European markets. We reiterate our Buy stance on the scrip with a TP of PKR490/sh.

Courtesy – IMS Research

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