AIRLINK 80.60 Increased By ▲ 1.19 (1.5%)
BOP 5.26 Decreased By ▼ -0.07 (-1.31%)
CNERGY 4.52 Increased By ▲ 0.14 (3.2%)
DFML 34.50 Increased By ▲ 1.31 (3.95%)
DGKC 78.90 Increased By ▲ 2.03 (2.64%)
FCCL 20.85 Increased By ▲ 0.32 (1.56%)
FFBL 33.78 Increased By ▲ 2.38 (7.58%)
FFL 9.70 Decreased By ▼ -0.15 (-1.52%)
GGL 10.11 Decreased By ▼ -0.14 (-1.37%)
HBL 117.85 Decreased By ▼ -0.08 (-0.07%)
HUBC 137.80 Increased By ▲ 3.70 (2.76%)
HUMNL 7.05 Increased By ▲ 0.05 (0.71%)
KEL 4.59 Decreased By ▼ -0.08 (-1.71%)
KOSM 4.56 Decreased By ▼ -0.18 (-3.8%)
MLCF 37.80 Increased By ▲ 0.36 (0.96%)
OGDC 137.20 Increased By ▲ 0.50 (0.37%)
PAEL 22.80 Decreased By ▼ -0.35 (-1.51%)
PIAA 26.57 Increased By ▲ 0.02 (0.08%)
PIBTL 6.76 Decreased By ▼ -0.24 (-3.43%)
PPL 114.30 Increased By ▲ 0.55 (0.48%)
PRL 27.33 Decreased By ▼ -0.19 (-0.69%)
PTC 14.59 Decreased By ▼ -0.16 (-1.08%)
SEARL 57.00 Decreased By ▼ -0.20 (-0.35%)
SNGP 66.75 Decreased By ▼ -0.75 (-1.11%)
SSGC 11.00 Decreased By ▼ -0.09 (-0.81%)
TELE 9.11 Decreased By ▼ -0.12 (-1.3%)
TPLP 11.46 Decreased By ▼ -0.10 (-0.87%)
TRG 70.23 Decreased By ▼ -1.87 (-2.59%)
UNITY 25.20 Increased By ▲ 0.38 (1.53%)
WTL 1.33 Decreased By ▼ -0.07 (-5%)
BR100 7,626 Increased By 100.3 (1.33%)
BR30 24,814 Increased By 164.5 (0.67%)
KSE100 72,743 Increased By 771.4 (1.07%)
KSE30 24,034 Increased By 284.8 (1.2%)

Systems Limited (PSX: SYS) was founded in 1977 as private limited company and was converted into a public listed company in 2005. SYS was listed on PSX in 2015. The principal activity of the company is the development and trading of software and business process outsourcing services. In short, SYS assists its clients in their digital transformation journey. Besides having a strong footprint in the local market, the company has a firm presence in the US, UK, EU and Middle East.

Pattern of Shareholding

As of December 31, 2022, SYS has a total of 290.407 million shares outstanding which are held by 6592 shareholders. The company’s directors are its largest shareholders with a stake of 32.65 percent in the company. This is followed by foreign investors holding 15.70 percent shares of SYS. Ex-employees account for 14.97 percent of the outstanding shares of the company. Other companies hold 14.04 percent shares of SYS. Local General Public has a shareholding of 13.01 percent while Mutual funds own 6.21 percent shares. Executives hold 2.22 percent shares while Banks, DFIs, NBFIs and Pension Funds hold 1.19 percent shares of SYS.

Performance Trail (2018-22)

The topline and bottomline of SYS has been growing staggeringly in all the years under consideration regardless of COVID-19 that hit the economy in 2020 and the economic and political instability in 2022 which put many companies out of business. Nothing could impede the company from growing by leaps and bounds with the highest topline and bottomline growth posted in 2022. While the GP and OP margins maxed out in 2020 and had been ticking down thereafter, NP margin boasts its finest level in 2022 – thanks to the exponential growth in other income in 2021 and 2022. Let’s discuss about the dynamics of each year under consideration in more detail.

In 2019, SYS’s topline grew by 42 percent year-on-year which came on the back of a selection of a better client portfolio which comprised of large companies which ensured sustained and recurring business to SYS. While the cost of sales also moved up mainly on account of increased salaries and wages, purchase of software, travelling and conveyance and technical consultancy, Gross profit posted a tremendous 51 percent year-on-year growth with GP margin clocking in at 33.2 percent in 2019 versus 31.3 percent in 2018. Distribution expense multiplied by 114 percent year-on-year in 2019, however, the fact that it stands at less than 2 percent of the sales in all the years under consideration, makes this hefty growth figure rather insignificant. Admin expense grew by 14 percent year-on-year, however, dropped as a proportion of sales from 10 percent in 2018 to 8 percent in 2019. Other expense inched by 17 percent year-on-year mainly on the back of a massive rise in trade debts. The company also booked provisions against doubtful refundable while contract assets and bad debts written off also significantly grew during 2019. Operating profit posted a year-on-year growth of 71 percent in 2019 with OP margin inching up from 16.9 percent in 2018 to 20.4 percent in 2019.

Other income couldn’t provide any support to the bottomline in 2019 as it plunged by 22 percent on the back of lesser exchange gain. Finance cost also grew by 108 percent in 2019; however, with the debt-to-equity ratio of 28.8 percent in 2019, finance cost didn’t produce much of a negative impact on the bottomline. The net profit grew by 35 percent year-on-year to clock in at Rs.1364.13 million in 2019 while NP margin slightly lowered to 25.5 percent in 2019 from 26.8 percent in 2018. EPS grew from Rs.8.16 in 2018 to Rs.10.95 in 2019.

Due to the outspread of COVID-19 in 2020, the businesses across the world were facing issues related to mobility. SYS made the most of these turbulent times by offering innovative offerings and solutions to its clients. The topline grew by 40 percent year-on-year which mainly came on the back of software implementation services which forms the major chunk of its revenue mix. Outsourcing services which forms the next big chunk of SYS’s revenue mix also boasted a staggering growth while software trading posted a marginal year-on-year growth of 4.6 percent in 2020.

It is to be noted that the company’s revenue is mainly driven by export sales with North American and European markets outshining the other geographical markets. Gross profit considerably grew by 58 percent year-on-year in 2020 with the GP margin of 37.2 percent. Operating expense grew in line with inflation, however, other expense slid by 3 percent year-on-year as the company didn’t write off any advances, contract assets and bad debts in 2020 and also didn’t book any provision against doubtful refundable in 2020. Operating profit posted a handsome year-on-year growth of 88 percent in 2020 while OP margin reached 27.2 percent. Other income posted a decline in 2020 on the back of lower exchange gain and lesser gains on the disposal of property and equipment. Finance cost inched up by 27 percent year-on-year. While discount rate dropped in 2020, the rise in finance cost is on account of increased borrowings during the year which took its debt-to-equity ratio to 35.6 percent in 2020. The bottomline posted a robust year-on-year growth of 61 percent in 2020 to clock in at Rs.2193.92 million with an NP margin of 29.2 percent. EPS also rose up by 58 percent to stand at Rs.17.31 in 2020.

In 2021, the magnitude of topline growth further increased to 58 percent year-on-year driven by demand in all the geographies and business segments. The main driver of a 68 percent year-on-year rise in cost of sales appears to be salaries and allowances while software purchases, depreciation, technical consultancy also played a significant role in driving up the cost. While gross profit grew by 43 percent year-on-year in 2021, GP margin weakened to 33.5 percent in 2021. Selling and administrative expenses posted a huge growth of 59 percent and 96 percent respectively in 2021. Other expense shrank by 87 percent year-on-year in 2021 on account of lesser allowance for expected credit losses during the year. Substantial growth in operating expenses pushed the OP margin down to 23.7 percent in 2021. Other income came to the rescue with an ample 128 percent year-on-year growth in 2021 mainly on account of striking exchange gain as company’s export sales are growing considerably.

Despite downtick in discount rate, finance cost expanded by 69 percent year-on-year in 2021 on the back of high borrowings. The debt-to-equity ratio has further swollen to 45.5 percent in 2021. The bottomline enlarged by 51 percent year-on-year in 2021 to clock in at Rs.3320.69 million with an NP margin of 27.9 percent which although is lesser than that of 2020, however, is bigger than the OP margin due to significant support provided by other income. EPS ticked down to Rs.11.98 in 2021 due to an increase in the outstanding share volume of the company.

Among all the years under consideration, 2022 outperforms with a year-on-year topline growth of 73 percent coming on the back of IT services. GP margin lowered to 32.7 percent despite growth in gross profit because of the impact of inflation as well as increase in company’s operations. Operating expense also increased. The main drivers were increased salaries expense, technical consultancy, and purchase of software, repair and maintenance as well as high advertising budget. SYS incurred a loss on derivative financial instruments which drove up the other expense by 428 percent. OP margin almost remained intact in 2022. Pak Rupee devaluation provided the growth impetus to other income which magnified by 219 percent year-on-year. High borrowing cost coupled with increased borrowing resulted in an increase of 166 percent in finance cost. Bottomline rose by 90 percent year-on-year to climb at Rs.6299.84 million in 2022 with an NP margin of 30.5 percent. EPS clocked in at Rs.22.29 in 2022.

Recent Performance (1QCY23)

SYS continues to impress in 1QCY23 with 69 percent year-on-year growth in topline. Record high inflation resulted in the rise in salaries and wages as well as other components of cost. Gross profit although grew by 57 percent year-on-year in 1QCY23, GP margin shrank to 28 percent from 30 percent in 1QCY22. Distribution expenses slid by 10 percent year-on-year in 1QCY23. Admin expense kept ticking up.

The company also booked reversals on trade debt in 1QCY23 as against impairment loss during the same period last year. The breather provided by distribution expense and reversals enabled the OP margin to move up to 20.7 percent in 1QCY23 from 19.3 percent in 1QCY22. Sharp decline in the value of Pak Rupee resulted in remarkable gains in other income which multiplied by 621 percent during 1QCY23. This provided impressive support to the bottomline despite a sizeable increase in the finance cost during 1QCY23. The bottomline grew by 241 percent year-on-year in 1QCY23 to clock in at Rs.3639.53 million in 1QCY23 with an NP margin of 53 percent as against 26.2 percent in 1QCY22. EPS boasted a steep rise from Rs.3.84 in 1QCY22 to Rs.12.42 in 1QCY23.

Future Outlook

As SYS continues to expand in new geographical markets, its export sales will continue to rise which will not only produce a positive impact on the topline but will also keep the other income buoyant amidst dropping value of Pak Rupee. Local sales will continue to remain under pressure in the coming times due to high inflation and lower demand due to economic slowdown which compelled businesses to cut down their cost. SYS’s capital structure is constantly turning in favor of debt financing due to high borrowings. While this will amplify the finance cost, it will be more than offset by stunning other income due to exchange gain.

Comments

Comments are closed.

Sarfaraz Ahmed May 03, 2023 09:27am
Thanks for the write up. It seems SYS has posted impressive revenues and earnings growth, but the increase in debt levels is a concern in the current high interest rate environment. Although the exchange gains will offset the impact of high finance cost - what happens if PKR stabilizes at around Rs270/USD? There won't be any exchange gains and high finance cost might eat up earnings. Also, it would be better if we analyse SYS's performance in terms of USD, not PKR, because this will show how the company has really performed on a constant currency basis and whether it's top and bottom-line growth is really impressive or not.
thumb_up Recommended (0)
Haroon May 03, 2023 09:56am
@Sarfaraz Ahmed, Market has overvalued the Systems. There really isn't as much growth in Systems as market thinks and you're right, the growth in exchange gain will stagnate now given the already heavy rupee devaluation which has occurred. In a company like Systems, main growth driver is human capital which is limited in Pakistan. Their initiative to set up their own technical school is good, but it is to be seen how much value and human capital that would generate.
thumb_up Recommended (0)
Omar Khan May 03, 2023 02:23pm
@Haroon, Systems has posted dollarized revenue growth of 36% year/year. It was perhaps over valued back in 2020 but now its def undervalued at 440-450. Plus there is no guarantee PKR will stabilize given the current political and economic mess, so SYS is a good hedge against further pkr devaluation. Over 30% growth in dollar terms year on year (for the past 5 years) with or without pkr devaluation is better than any company listed on the PSX.
thumb_up Recommended (0)
Az_Iz May 04, 2023 03:16am
Anyway you look at it, this is a great company with great prospects.
thumb_up Recommended (0)
Imran Yahya May 04, 2023 08:08pm
Very nice analysis of system ltd.Now share price is down.My holding since last year @500 , please suggest am i hold or replace with any other ?
thumb_up Recommended (0)