Systems Limited becomes first Technology Company in Pakistan to cross PKR100bn market capitalization
Systems Limited share price touched upper limit of PKR740.93 today that translates into market capitalization of PKR102bn. Systems Limited has gained momentum after delivering of strong financial performance by the company in June quarter and strong balance sheet position of the company.
Systems Ltd (SYS) is an IT Services company, which is engaged in the implementation and management of various IT solutions (software developed by third-party companies such as Microsoft and Oracle), consulting and BPO services for its clients based in North America, Middle East, Europe and Pakistan. The suite of services include digitization, e-commerce, website management, data migration, data analytics and cloud services.
About 80% of its revenues are derived from exports – North America constituting nearly half of the exports – and c.90% of the company’s revenues are recurring. Its human resource is majorly based in Pakistan.
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Intermarket Securities Limited analyst Rahul Hans in a recent published note has said that “We have upgraded our estimates for SYS and rolled over valuations to Dec 2022 – with a new TP of PKR950/sh (vs. PKR685/sh earlier) maintaining our Buy rating. While our overall thesis is unchanged, SYS has delivered higher-than-expected revenues/profits in 1HCY21 to warrant the upgrade.”
System generates c.76% of its consolidated revenues from software implementation; and within this segment, c.85% of the revenue are exports. Major services in this category includes: application development, IT infrastructure, cloud services, automation and many others. The remaining quarter of total revenues comes from (i) BPO (Business Process Outsourcing) which constitute c.16%, (ii) software trading, and (iii) sale of air-time (Oneload) which took c.4% of revenues in 2020.
SYS has more than 400 clients, and majority of them are US based and are Fortune 500 companies. About 45% of total revenue comes from the US, 27% from Middle East, 8% from Europe, and remaining 20% from the local market. SYS has only recently opened offices in Germany which is expected to increase Europe’s share in total revenues in the future. As per Statista, Europe commands c.25% of total IT spending globally (second only to the US).
SYS provides long-term services contracts, project based work and licensing services to its customers. About c.90% of the revenue is recurring, meaning every nine out of ten customers were also with the company the year before. This is partly because of multiple business lines which SYS can offer to a single client. The company guides that over 20% Revenue CAGR can be achieved by offering more services to the existing clientele – not only by acquiring new customers. This is why nearly 50% of the total SYS revenues is drawn from the top 10 customers.
Also, the ever-expanding range of IT services makes this possible. For instance, AI and Big Data are not yet major services of SYS, but can become so in the future, when client demand more of these services; SYS’s strategy to expand its HR, including offshore employees, raises optimism about this possibility.
SYS offers a wide range of services to Retail and Consumer Packaged Goods (CPG) industries in both export and local markets. The services include digitalization, ecommerce, website management, data migration, and cloud services. With the help of Microsoft Dynamics 365, an ERP, SYS manages many aspects of the clients’ operations: supply chain, finance and customer services. The solution helps retail companies in delivering exceptional customer experience (CX). The industry is also capable of allowing cross-selling and up-selling of services – for instance, analytics of consumer data and cloud services is an extension of the consultancy, software implementation and management services already provided.
The Retail & CPG industries contributed c.15% of total consolidated revenues in CY20 – being the third largest industry of customers. Following the onset of Covid-19 pandemic, most of the retail businesses around the world have rapidly moved towards digitization and cloud services. The trend was already underway but many companies expedited digital projects planned for later years. As per the UN, Covid19 helped lifting e-commerce’s share of global trade from 14% in 2019 to 17% in 2020. Online sales in the US are worth around US$1.2tn industry – c.15% of total retail sales.
A recent survey by McKinsey, a consultancy, reveals that 30-40% of customers in the US and Europe show purchase intent for online. The industry is increasingly embracing new digital technologies, such as AI and Cloud, to improve operations and CX. Thus we expect the revenue share from Retail & CPG to outperform other revenue sources in the medium term, in our view. This has already happened in 1QCY21, where the segment contributed c.20% of total revenues.
Europe is relatively a new and small market for SYS. In CY20, it had the smallest revenue share, of c.8%, among the major markets. Europe revenues, however, grew c.74% yoy in CY20 to PKR825mn. So far, SYS has had presence in Germany only (opened an office in 2017) but it has recently entered the UK. The region can offer significant room for growth because of (i) the scarcity of IT personnel on the continent, and (ii) the global shift to more offshore work. Moreover, the Europe market offers higher gross margins than do Middle East and Pakistan.
In CY20, gross margins in Europe were 39.6% compared with 21% and 21.5% in Middle East and Pakistan, respectively. The company’s strategy in Europe is not to grow geographically in other countries, but to limit its focus and penetrate the two largest countries in the region. We highlight that the entry in UK could mean that SYS will tap into the large financial market in London; recall BFS is among the largest consumers of digital services globally. If successful in this pursuit, SYS will accelerate the growth in exports and meaningfully diversify its US presence, in our view.
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