Equity Analysis /

Systems Ltd: Pakistan’s best digital story; initiate with a Buy

  • We initiate coverage on SYS with a Buy rating and Dec 2021 TP of PKR685/sh (potential upside of c.50%)

  • We expect 5yr Revenue and EPS CAGR of 23% and 32% resp – has the right mix of services amid surge in global IT spending

  • Globally, comparable companies with similar growth outlook as SYS trade well above 50x forward P/E

Intermarket Securities
27 May 2021

Globally, many industries are rapidly adopting digital services to transform their operations – a trend that has been accelerated by Covid-19 and will take global IT spending to a c.US$4.3tn market by 2022. In this backdrop, we initiate coverage on Systems Ltd (SYS), a leading exporter of IT Services in Pakistan, with a Buy rating and Dec 2021 TP of PKR685/sh.

With c.US$50mn of exports, SYS is tiny compared with the overall market. About 90% of its revenues are recurring, and it has focused on industries which are either large consumers of digital services (finance and telecom) or will see the greatest digital transformation post Covid-19 (retail).  

SYS is unique (on the PSX) and deserves premium valuations. We expect 5yr Revenue/Earnings CAGR of 23%/32%. With such growth potential and similar gross margins, comparable global IT Services stocks trade well over 50x forward P/E (details inside).

Initiate with Buy and a TP of PKR685/sh

We initiate coverage on Systems Ltd (SYS) – a leading exporter of IT Services in Pakistan – with a Buy rating and December 2021 TP of PKR685/sh (blended valuation). SYS is a unique stock on the PSX, for which we expect 5yr Revenue and Earnings CAGR of c.23% and c.33%, respectively (similar to the past three years). The company offers such services as implementation of enterprise software (developed by third-parties such as Microsoft, IBM and Oracle), Cloud migration, and BPO (outsourcing) to customers based in North America, Middle East, Europe and Pakistan. About 80% of its revenues are exports (half of them to the US), and c.90% of the revenues are recurring. Our TP for SYS implies a potential upside of c.50% and it is our new top pick in the IMS Universe.

Revenue and EPS CAGR of over 20% are very likely  

We think that maintaining Revenue/EPS growth of over 20% yoy in the next five years is very probable for SYS. Globally, companies spend c.US$1tn on IT services, and nearly half of this spending is addressable market for SYS (which had exports of only US$50mn in 2020). To capitalize on this growth opportunity, SYS has rightly focused on industries which are either large consumers of digital services (finance and telecom) or are undergoing the most profound digital transformation (retail and apparel) thanks to Covid-19. SYS’s largest market will remain the US, but its recent entry into Europe could mean new business from the large Financial sectors of UK and Germany, and also lift overall gross margins (as Europe is among the most profitable markets). In the Middle East, customers have stated to prefer off-shore services since the onset of Covid-19, which is also enabling SYS to reduce costs. Global rollout of 5G networks is another catalyst for growth, in our view.

Global comps suggest premium valuations are warranted

We looked at three US based IT companies for comparison – EPAM, Globant and Virtusa – which are present in similar markets but their employees are majorly located in the CIS region, Latin America or Asia. Despite revenues of nearly US$1bn, the aforementioned companies have sustained revenue growth of over 20% over the past 10 years and have gross margins of c.35% (SYS 3yr avg: 31%). Thus, they are trading at average forward P/E of over 50x. Given that they have more specialized services than SYS, their Revenue/employee is far greater than SYS of c.US$55,000 on average (SYS: US$19,500), suggesting there is ample room for revenue growth.

Risks to our thesis

(i) Difficulty in finding quality HR and high employee turnover; (ii) global image of Pakistan deteriorates; (iii) rapid recovery from Covid-19 delaying global digitization.