System Limited: Regional expansion in the offing

September 16, 2020 (MLN):  Most of the businesses’ rapid growth slowed to a crawl in the last two quarters owing to an ongoing pandemic. However, 1HCY20 seemed impressive for System Limited as it had posted earnings of Rs. 1.06 billion (EPS: 8.73), i.e. around 22% higher as compared to the same period of last year.

This improvement in the bottom line was primarily caused by a 27% YoY increase in revenue. According to the research report by Insight Securities, growth in revenue was mainly attributed to an aggressive expansion drive, resulting in regional revenue accretion in the USA and Europe.

However, the report mentioned that the UAE segment saw a contraction in revenue which was luckily compensated by the European region.

SYS has proven its resilience through the COVID-19 pandemic where it showed its all-time highest consolidated revenue along with better than expected gross margins of 31% during 1HCY20. To curtail the spread of the virus, the government of Pakistan only allowed essential services to operate which favored SYS as the IT sector declared as an essential service.

Shedding light on the financial results, the report said that the effective cost optimization drive resulted in operating margins amid pandemic, Not only this, SYS also posted high operating cash flows due to excellent capital management as debtor recovery ratio stood above 100%, resulting into quarterly cash conversion cycle of 47 days versus previous quarterly cycle of 55 days.

The report highlighted that SYS’s expected credit allowance charge for 1HCY20 under IFRS 9 stood at Rs 29 million, showing a 57% decrease against Rs 67 million booked in the same period last year, depicting the exceptional credit profile of trade debtors.

The company witnessed an excessive cash generation for the quarter, leading to the highest ever short-term investments of Rs1.9billion. During the recent investor briefing session, management hinted at utilizing excessive cash flows in exploring new growth avenues. Currently, SYS has footprints in the USA, UAE, Europe, and Pakistan. Management stated that the African region has a high potential for IT development, the research concluded.

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