Karachi, September 07, 2022 (PPI-OT): System Limited: Proxy to Pakistan’s Tech boom!
We re-initiate our active coverage with an “Overweight” stance on Systems Limited with a Jun’23 Target Price of PkR505/sh, implying an upside of 27% from last close. A strong revenue profile consisting of various revenue streams across multiple regions brings tremendous growth to the topline of the company, with a revenue CAGR of 43% from CY17 to CY22F. The company boasts key partnerships with strong global brands such as Microsoft, SAP, Oracle and IBM which helps attract clients, bringing authenticity to the company’s offerings. Systems’ Revenue/Cost breakup offers it protection against currency depreciation, with ~85% of revenue in foreign currencies and ~76% of costs in PkR, a 5% depreciation in the Rupee is estimated to positively impact the earnings of Systems by 7.6% on an annualized basis.
A substantial increase in the workforce (~66% increase since CY19) will enable the company to take on new contracts without hindrance. Moreover, with more than ~80% of its workforce in Pakistan, Systems enjoys a significant cost advantage over its global peers, enabling it to pursue clients with annual IT expenditure of less than US$1mn, a market share overlooked by competitors. Heavy investments in subsidiaries and associates has brought along potential for substantial revaluation gains as the startups further acquire funding, while enhancing operations in current regions along with expansions into new ones.
Strong revenue profile: Strong revenue growth driven by a diversified portfolio of services across various sectors, along with expansion into new regions. ~85% of revenue is generated from exports, and we expect this proportion to grow as the company ventures into new regions. The majority of revenue is derived from recurring clients, while the top 10 clients contributed 40% of the revenue for 1HCY22.
Furthermore, affiliations with Oracle, IBM, and Microsoft will help the company attract clients due to strong brand value of its partners. Owing to its growth, Systems will end CY22 with a revenue CAGR of 43% from CY17 to CY22F. Moreover, Systems’ Revenue/Cost breakup offers it protection against currency depreciation. With ~85% of revenue in foreign currencies and ~76% of costs in PkR, the company is well positioned to capitalize on the depreciation. According to our estimates, a 5% devaluation in the Rupee has a positive impact of 7.6% on the earnings of the company.
Growth on all fronts: A strong expansion in the workforce of the company (~66% increase since CY19) is likely to enable it to take on more contracts without being hampered by the limitations of its workforce. The average salary of IT professionals in Pakistan is relatively lower compared to other countries in the region, hence entailing a significant cost advantage for Systems (~80%+ of workforce in Pakistan). This enables the company to acquire clients of annual IT budget of less than US$1mn, a market segment frequently overlooked by global competitors.
Furthermore, on the investment side, SYS has recently invested heavily in associates and subsidiaries to expand into new regions along with acquiring stakes in fast-growing startups to fuel inorganic growth. In 1HCY22, the companies contribute 23% of revenue and 6% of the bottom-line. Moreover, as the startups acquire more funding, revaluation gains will provide substantial boost to earnings for the company.
Investment Perspective: We have used a P/E multiple of 21.2x (TP: PkR507/sh) and a P/S multiple of 5.3x (TP: PkR503/sh) for our valuation of SYS, hence arriving at our blended Target Price of PkR505/sh. We expect the company to post Revenue of PkR23.2bn in CY22 and PkR29.9bn in CY23, while we project earnings of PkR6.0bn in CY22 (EPS: PkR21.3) and PkR7.4bn (EPS: PkR26.5) in CY23. Key downside risks to our pitch are; i) new regions unable to bring the expected boost to revenue, ii) a strong recovery by the Rupee will diminish revenues and hence profitability, and iii) higher attrition rate of employees as retention of a large workforce may be difficult to manage for the company.