We reiterate our ‘BUY’ stance on Systems Limited (SYS) with a December 2025 Target Price (TP) of Rs707/share, offering a potential upside of 24% (total return: 26%). We expect EPS CAGR of 33% and 26% for the next 3 (2025-27) and 5 years (2025-29), respectively, compared to the last five years CAGR of 52%.
We expect the company to post earnings growth of 38% and 35% in 2025 and 2026, rebounding after witnessing a fall of 24% in 9M2024, mainly due to improvement in gross margins and higher revenue growth from different segments.
§ Cost optimization to improve margins and profitability: With falling inflation in 2025 and 2026, we expect the company to maximize the spread between revenue and cost per employee after a year of significant cost increase and appreciation of PKR. That said, with improving margins and likely absence of exchange losses, we believe Gross Margins will rise to 24.5%/25.0%/25.6% in 2025/2026/2027, from ~23.9% in 2024 and EPS is expected to clock in at Rs36.5/49.1/62.6 after witnessing ~11% decline in 2024.
§ Geographical diversification to support revenue growth trajectory: In 9M2024, 58%, 22%, 13%, 4% and 4% of revenue was generated from the Middle East, North America, Pakistan, Asia Pacific, and Europe, respectively. Growth in coming years will be led by Asia Pacific and Middle East segment. According to various research estimates, the Asia Pacific IT market size stood at US$360-400bn in 2023 and is expected to grow at a CAGR of 11%. We expect SYS Asia Pacific revenue to grow at a 3-year CAGR (2025-27) of 35/42% in USD/PKR terms to US$21mn/Rs6.9bn.
§ Middle East region has become the highest revenue driver since 2022. We expect Middle East revenue to grow at a 3-year CAGR (2025-27) of 28/35% in USD/PKR terms to US$296mn/Rs96bn. According to Statista, Middle East & Africa (MENA) IT services market size is US$29.6bn in 2023, we expect the company to increase its market share in MENA region from 0.43% in 2024 to ~0.76% by 2027.
§ Outperforming the IT sector of Pakistan: Pakistan’s IT exports have increased at a 5-year (2019-2023) and 10-year (2014-2023) USD CAGR of 20% and 12% respectively. Meanwhile exports of SYS have increased at a 5-year (2019-2023) and 10-year (2014-2023) USD CAGR of 37% and 30% respectively. Going forward, we expect company to continue to outperform the sector with exports growing at a 3-year (2025-27) CAGR of 23% to reach US$391mn. Market Share of SYS in Pakistan’s IT exports is expected to increase to 6.8% by 2027.
§ Diversifying supply base – Expansion of workforce outside Pakistan: Systems has recently expanded its workforce outside of Pakistan to better serve its new Middle Eastern markets with a ground presence and localized approach (Arabic-speaking resource). The share of employees based in Pakistan has decreased from 95.0% in 2019 to 84.6% by 2024. Countries like Egypt which boasts an Arabic speaking population, hosts 2.5% of the SYS’s workforce, with highest 10.5% in UAE.
§ Healthy cash balance to lead to future acquisitions: SYS is expected to generate EBITDA of Rs13.0/17.3/21.8bn in 2025/26/27 respectively. Company is expected to have sufficient free cash flows going forward. SYS plans to take advantage of favorable regulatory developments and create management structures that enable inorganic growth through mergers and acquisitions.
§ Attractive Valuation: We have used a blended valuation methodology with Free Cash Flow to Equity (FCFE) using Discounted Cash Flow (DCF) based valuation and multiples-based valuation. Based on that, we arrive at the Dec-2025 target price of Rs707/share, suggesting a total return of 26% (including a dividend yield of 2%) at the closing price of Rs568.9/share.
§ SYS trades at a 2025/26F PE of 15.6/11.6x, as compared to its 5-year and 10-year average PE of 16.0x and 14.1x, respectively. SYS 2025/26F PE of 15.6/11.6x compares favorably to regional peer companies with PE of ~24x. It also trades at 2025 and 2026 PS of 1.9x and 1.5x compared to regional peer companies PS of 4.0x.
§ Key Risks: (1) Slowdown in global IT spending, (2) High Employee turnover due to competition from startups, freelancing and migration, (3) Unfavorable government policies impacting export growth, (4) Substantial PKR appreciation could impact SYS profitability, (5) Normal taxation on services exporters similar to goods exporters, (6) Any existential threat such as the rise of Artificial Intelligence (AI) that might disrupt the IT industry.
Courtesy – Topline Pakistan Research
