Earnings Report /
Pakistan

Systems Ltd: 2QCY22 Preview – Massive earnings jump amid higher topline and exchange gains

  • SYS is expected to post 2QCY22 consolidated NPAT of PKR1.55bn (EPS: PKR5.59), up 70% YoY and 30% QoQ

  • Other income is expected to clock in at PKR421mn in 2QCY22 vs. PKR334mn in 1QCY22 amid higher exchange gains

  • SYS can potentially book one-off FV gain on its associate Retailistan, as its fully owned subsidiary Jugnu raised funds

Intermarket Securities
23 August 2022

SYS is expected to post 2QCY22 consolidated NPAT of PKR1.55bn (EPS: PKR5.59), up 70% YoY and 30% QoQ. Key expectations behind the strong jump in earnings are: (i) surge in revenue amid higher influx of orders and PKR devaluation, and (ii) exchange gains related to other income. SYS can potentially book one-off FV gain on its associate Retailistan, as its fully owned subsidiary Jugnu has raised USD22.5mn in Series A funding on 26Mar’22, which may potentially result in a non-cash positive earnings surprise. 

Key expectations for 2QCY22 results

  • Net sales are expected to rise 77% YoY and 16% QoQ to PKR6.2bn. Possible drivers are: i) higher sales to US and UAE market and presence in new geographies like Europe and Saudi Arabia, ii) continued addition of new employees coupled with introduction of new services, and iii) PKR devaluation of around 8% in 1HCY22.

  • We expect gross margins to decline by c.1.0ppt YoY, but increase by 2.7ppt QoQ to 32.7% in 2QCY22. The YoY decline in GMs is majorly due to the continuous increase in the number of fresh graduates hired during last year. Fresh employees usually go through extensive 4-6 month training programs before contributing to topline.

  • Other income is expected to clock in at PKR421mn in 2QCY22 vs. PKR334mn in 1QCY22. The QoQ increase is majorly due to higher exchange gains, which are expected to clock in at PKR276mn (c.PKR0.99/sh), due to massive PKR depreciation in 2QCY22 vs. PKR149mn (c.PKR0.54/sh) in 2QCY22.

  • In other line items: i) finance cost is projected to rise by 197% YoY and 10% QoQ as short-term borrowings and interest rates have both increased, ii) admin expenses will increase substantially by 69% YoY to PKR456mn in 2QCY21, and iii) despite the imposition of 4% super tax on CY21 and 1HCY22, effective tax rate is expected to clock in at 7.4% vs. 2.1% in SPLY, this is due to adjustment of deferred tax asset already available to the company.

SYS is likely to post higher topline and profitability once the amalgamation of NdcTech is finalized. Also, the core earnings in 2Q continue to post decent growth. 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 data-driven services to international clients. Additionally, gross margins will expand further 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, offering potential upside of 32%.