Earnings Report /
Pakistan

Systems Ltd: 3Q22 Preview - Earnings to rise exponentially amid better GMs & Exch. gains

  • SYS is expected to post 3QCY22 consolidated NPAT of PKR2.6bn (EPS: PKR9.03), up 152% YoY and 48% QoQ.

  • We expect gross margins to rise by c.1.4ppt YoY and 1.9ppt QoQ, in 3QCY22 to 35.4% amid massive PKR depreciation

  • Other income is expected to clock in at PKR977mn in 3QCY22 vs. PKR647mn in 2QCY22, owing to higher exchange gains

Intermarket Securities
19 October 2022

SYS is expected to post 3QCY22 consolidated NPAT of PKR2.6bn (EPS: PKR9.03), up 152% YoY and 48% QoQ. Key expectations behind the strong jump in earnings are: (i) surge in revenue amid higher influx of orders and PKR devaluation, (ii) exchange gains and interest income related to other income and (iii) post acquisition consolidation of NdcTech in 3Q. 

Key expectations for 3QCY22 results

  • Net sales are expected to rise 77% YoY and 15% QoQ to PKR7.0bn. Key drivers are: i) higher sales to Middle East region (post expansion and new geographies), ii) higher growth from North American market and contribution from NdcTech, iii) continued addition of new employees coupled with introduction of new services, and iv) PKR devaluation of around 15% vs. the USD in 3QCY22.

  • We expect gross margins to rise by c.1.4ppt YoY and 1.9ppt QoQ, in 3QCY22 to 35.4%. The increase in GMs is expected to majorly be driven by massive PKR depreciation. Majority of SYS’ revenue (c.85%) is denominated in foreign currencies, whereas costs are largely PKR denominated.

  • Other income is expected to clock in at PKR977mn in 3QCY22 vs. PKR647mn in 2QCY22. The QoQ increase is majorly due to higher exchange gains, expected to clock in at PKR644mn (PKR2.22/sh), vs. PKR516mn (PKR1.78/sh) in 2QCY22.

  • In other line items: i) finance cost is projected to rise by 104% YoY and 10% QoQ as short-term borrowings and interest rates have both increased, ii) admin expenses are expected to increase substantially by 64% YoY to PKR548mn in 3QCY21, on account of fresh entry in new geographies and iii) effective tax rate is expected to clock in at 0.7% vs. 2.4% in SPLY, owing to the revision in turnover tax on IT exporting entities to 0.25% in FY23 budget, against 1% previously.

SYS is likely to post decent topline and profitability growth post amalgamation of NdcTech and TreeHouse Consultancy in the coming quarters. The core business is likely to continue the present growth momentum, backed by: i) the continued acquisition of new clients, coupled with greater orders coming from existing clients, ii) introduction of new services amid expansion in new geographies; and iii) higher software implementation, cloud based and data driven services to international clients. Additionally, gross margins are likely to expand further in the coming quarters owing to topline growth in the higher margin markets (North America, Middle East and Europe), and possible PKR depreciation. SYS has gained 16% CYTD. We reiterate our Buy stance on the scrip with a TP of PKR660/sh, offering potential upside of 49%. We await mild dilution of c.4% related to NdcTech acquisition, which will put our TP at PKR633/sh.