Equity Analysis /
Pakistan

Systems Ltd: Multiple avenues will continue stellar growth momentum

  • We upgrade our estimates for SYS and incorporate new acquisitions and geographies. Our new TP is PKR660/sh

  • Our CY22/23f EPS are PKR24.5/34.0, amid strong growth from existing & new markets and consolidation of new acquisitions

  • SYS has gained c.5%CYTD in PKR terms, giving it ample room to now kick on and reach all-time high market capitalization

Intermarket Securities
8 September 2022
  • We upgrade our estimates for SYS and incorporate new acquisitions and geographies. Our new TP is PKR660/sh vs. PKR490/sh earlier, and we maintain our Buy rating. SYS has delivered higher-than-expected revenues/profits in 1HCY22 to warrant the upgrade.

  • Our new CY22/23f consolidated EPS are PKR24.5/34.0, where key drivers are the robust demand for software implementation, cloud-based and AI related services. Continuous expansion in new markets and inorganic growth will help SYS to continue its hyper growth momentum, in our view.

  • On core earnings, SYS trades at a CY23f P/E of 13.0x, which does not justify the 5-year forward EPS CAGR of 35%. Current valuations are at a 40% discount to the average valuations of comparable global companies. SYS has gained less than 5%CYTD in PKR terms, giving it ample room to now kick on and reach all-time high market capitalization. 

Several factors lead to better valuations

We raise our TP for SYS by 35% to PKR660/share, up from PKR 490/share previously. This has come about due to (i) better-than-expected 1HCY22 performance, (ii) entry into geographies with healthy growth potential, (iii) continued swift growth in existing markets, and (iv) consolidation of recent synergy-enabling acquisitions of NdcTech and TreeHouse in 2HFY22. We see massive earnings growth of 58%/39% YoY in CY22/23f, while our CY22-24f EPS estimates are now higher by 10% on average. Our new TP of PKR660/sh is based on PKR610/sh assigned to core valuation (blend of DCF & 20x P/E), and PKR50/sh attributable to the aforementioned recent acquisitions. SYS arguably justifies a higher terminal growth rate than the 5% we are currently employing, given more than 80% of the revenue is USD-denominated and we expect the PKR alone to depreciate by 5%pa versus the USD. This can significantly propel valuations – for instance our TP would rise to PKR750/sh in case we employ terminal growth rate of 8%. 

Middle East performance has been excellent

Bellwether business in North America has continued to be robust, with revenue lines such as software implementation, Cloud, Data and AI-based services all performing well. With this background, the Middle East performance has been phenomenal, where consolidated revenue from the Middle East exceeded that of the North American market for the first time (in 1HCY22). Specifically, ME has posted revenue of USD25mn, up 100% YoY in 1HCY22, whereas North America has grown by 30% YoY to USD23.3mn. The NdcTech acquisition, recent partnership with SAP and greater focus on the Middle East (incorporation of Systems Arabia, and service centers in Egypt) will help deliver a 5-year dollarized CAGR of c 30% in the region. SYS has also established presence in Singapore and South Africa, which will help keep it on its hyper growth trajectory (dollarized revenues were up 48% YoY in 1HCY22). 

New synergies will kick in

SYS has fully acquired two new tech companies. NdcTech implements core and digital banking transformation services in Pakistan, Asia Pacific, Middle East and Africa. This 20+ year old company has partnered with Temenos to provide its SaaS based services. SYS already had strong presence in BFS (Banking and Financial Services), providing support services such as enterprise solutions, automation and business process management services. This acquisition completes its product suite in this space, and it will now provide Temenos SaaS based services to its clientele.  This increases the potential to add new customers, unlocks synergies and unleashes growth earlier than would have arisen before the acquisition.