SYS has posted 3QCY22 consolidated NPAT of PKR2.15bn (EPS: PKR7.41), more than double compared to last year (+22% QoQ). The result came in lower than our expected earnings of PKR2.6bn (EPS: PKR9.03), with lower margins and higher admin expenses offsetting impressive revenue growth.
Key result highlights:
Net sales increased by 2.2x YoY and 42% QoQ to PKR8.7bn, against our expectation of PKR7.0bn. The impressive jump in the topline is majorly driven by: i) higher sales in existing exporting regions, coupled with accelerated growth from new geographies, ii) continuous addition of new employees, iii) introduction of new services, iv) PKR devaluation of c.15% in 3QCY22, and v) combined contribution of PKR895mn from NdcTech and TreeHouse.
Gross margins contracted by 2.8/2.4ppt YoY/QoQ to 31.2%, sharply lower than our expectation of 35%. This may be due to greater than expected addition of fresh employees. Hiring of new employees in new geographies may also have had an impact, in our view.
Other income surged by 157% YoY and 16% QoQ to PKR754mn, but missed our expectation of PKR977mn. This might be due to lower than expected exchange gains. We expected exchange gains of PKR644mn (PKR2.22/sh).
In other line items: i) finance cost rose by 149% YoY to PKR69mn amid higher short-term borrowings and interest rates, ii) admin expenses increased substantially by 134% YoY to PKR780mn (IMS estimate of PKR548mn), amid increased presence in new geographies, and iii) distribution expenses increased by 5% YoY to PKR186mn in 3QCY22.
Effective tax rate clocked in at 5% vs. 2.4% in SPLY. This is despite the downwards revision in tax rates for the IT sector in FY23 budget to 0.25% from 1% previously. We await detailed financials for more clarity.
SYS has posted an exceptional topline with a growth of 45% YoY in USD terms (excluding NdcTech and TreeHouse revenues). However, margins declined compared to the previous year amid fresh presence in new geographies and addition of employees. Going forward, we expect SYS to continue its hyper growth momentum owing to i) continued acquisition of new clients, together with higher influx of orders from existing clients, ii) introduction of new services, as well as expanding into new geographies, and iii) inorganic growth. We believe, gross margins are likely to increase post higher revenue contribution from new geographies and PKR slippage, coupled with higher contribution from new employees. We reiterate our Buy stance on the scrip with a TP of PKR635/sh, offering potential upside of 47%.