Can SYSTECH Leads the Way?

If one looks at Systech revnue and profit over the 5 years, nothing fantastic. Refer to Systech's last 6 years revenue in the table below, it it has growed almost 3 times from $6m to $15m. But PBT is not in tandem, where it stucks at $3m which is abotu the same as 2013 and 2015.

So what's so interesting about Systech and also it's future?



If track from the QRs, no doubt the e-business solution is the most making money division under Systech. However, the management admitted that the growth for it's e-business solution is limited, about 10-20% growth max. The new acquired divisions, e-Logistics can contributes about $0.5m profit per year and software applications are still in losing stage. We hope these 2 new divisions able to push up the profit to higher stage upon adjustment to the group.

I reckoned that the one which has the huge potential growth is cybersecurity solution division.With the booming of cyberattacks recently, there's attention paying to this company where one of it's business arms, SysArmy is purely specializing on cybersecurity solutions and services. The attacks have forced most of the companies especially FSI and telco to fork out budget to enhance their ICT security and do prevention. Not only that, SysArmy is not only targeting in Malaysia but also Indonesia market as well.

SysTech past 6 years revenue & PBT

As per Systech's director mentioned to media in Oct 2016, SysArmy revenue's will be contributing 50% of SysTech's total revenue from 19%. But he did not mention WHEN and also what's the bottom line growth. SysArmy revenue has grew up to $3.6m in FY17, about 24% of total Systech's revenue, where FY16 is about 17%. 

Unfortunately, SysArmy has been not making much profit even though the revenue is growing in a fantastic mode. We can noticed that the loss is reducing and the latest 6 months outcome is having $8k loss. Up to 1H18, the revenue seems not growing as rocket comparing the previous FY. If the upcoming revenue for Q3 & Q4 is also about $1m each at my conservative estimation (remember the management target of 50%), then it makes up about total $4m and estimated GP of $100-150K based on current QR profit margin.

SysArmy's FY revenue & GP

So how can SysTech and SysArmy brings benefits to investors? What are the prospects that SysArmy has for now?

Personally, I'm working under an IT company which is focusing on ICT networking and security. I've about 16 years of experience in IT industry. So I'm quite well-verse on how SysArmy business works. We are also dealing with SysArmy on certain opportunities since this year, which we and our customers have no complaint so far. Perhaps my background and understanding on the business able  to make me contribute my view about SysArmy and the business slightly better.

Business Model

SysArmy is specializing only in cybersecurity solution and services, including 1 Next Gen Security Operation Center (NGSOC) and also recently a newly setup training center. They mostly only do services, and if it's turnkey then they will have to bundle products and solutions. Hence, the margin is way better than the typical IT distributor like ECS. Although they are similar like system integrator like MSNIAGA and HTPADU, but they are only specializing in cybersecurity solution and services. Hence, it is a niche market where many system integrator and distributors are started to work on this field and build resources.

Nonetheless, ICT security experts and resources are generally scarce in Malaysia and ASEAN at this moment. It is scarce because it is very difficult to obtain the professional certification, such as CISA, CISM and CISSP. Hence, it's not anyone can be a ICT security consultant. Because of the scarcity, the wages for CISSP is extremely good in the region. Hence, it is quite costly to maintain certain CISSP headcounts unless you have certain projects in hand.

SysArmy services offering

Advantages

This is why I do not surprise to see SysArmy facing losses all this while as they have a full certified team including CISSP and CISA personnel. This is good as it provides a slightly higher barrier of entry. From what I noticed, most of the ICT security projects requiring certifications as requisition. With the scarcity of resources and the specific tender requirement, SysArmy has a better advantage to win more projects with slightly better margin due to less competition comparing to normal ICT projects.

From what I found out, Security Commission (SC) has enforced new guideline in 1st Nov 2016 where entities are required to implement adequate physical and systems security arrangements. Bank Negara has also addressed the safeguard for FSI in Aug 2017 as well. Hence, the involving companies will have to allocate budget to follow the guideline and assessment and able to bring business to SysArmy if they have the connections and win the projects.

On top of that, SysArmy also working closely with Cybersecurity Malaysia Association to improve the ICT security protection within SME in Malaysia. They just worked together to launch the SME package mid of this month.

Other advantages SysArmy has including it has granted MSC status last year which provides 10 years of tax exemption in Oct 2016. It also achieves Certification to ISO/IEC 27001:2013 in Dec 2015.

As of cost control, I would say they are prudent in spending after dealing with them a couple of times. In a way I think they are also control by SysTech. They have about 65 staffs for now and I can see they have hired a lot of Bumiputra staffs as ground staffs. It should have some added advantage in bidding & implementing projects from my perspective.

Disadvantages

The first disadvantage comes to my mind is definitely competition. I did mention the barrier of entry is slightly higher due to lack of certified resources. However, resources can be trained and they will grow if the market is growing. Since this niche market profit margin is higher than normal ICT solutions, definitely more and more companies will jump in and grab the cakes. Just look at property sector then you will know. When competition is getting stiffer and the vendors offering is about the same, then it downs to price war. SysArmy will have to continue it's innovation and connections in order to take the lead and grab more key customers.

The second con will be the resources. As the resources are scarce, the key persons might be targeted and offered by other companies to do the same thing. Once the key persons are going, the customers might be gone as well. That's the fact for this industry. A good example is SysArmy CEO has quit SysArmy few months ago and open up his own firm. That means the prospect is really good but unfortunately it falls under resource's threat.

The last disadvantage will be the diluted shares & low ownership. Up to now the shares have been diluted around 38% compared to last year due to the shares allocated for acquisition of Postlink and Rofarez owners. Hopefully these 2 companies can generate sufficient profits to cover up the diluted shares within 1-2 years. One have to remember Systech only owns 50% of all these 3 companies, SysArmy, Postlink and Rofarez. So all profits will have to divided by half before give it to shareholders.

Latest QR Comment

The latest QR is disappointed for sure, due to the high selling expenses (almost doubled), cost of acquisition & losses brought by Rofarez. However, without all these costs, it should be making slightly lower profit as previous quarter as partly can be offset by Postlink $126K GP. From what I observed, the main gap is the 35-50% profit reduction from e-Business solution.

Nonetheless, with the stronger coming up from Cybersecurity division and hopefully e-Business solution's profit can come back by next quarter, it might be a beautiful 3Q18 for SysTech.

Conclusion

This company definitely has a good near future prospect from the business point of view. It just happened that the share price has retreated 33% from the peak, perhaps due to KLCI retracement and poor latest QR. There's no way to evaluate Systech with the PER but only prospect. With the combination of business model and advantages I summarized in addition to the retreated price of only 30.5 cents + possible beautiful upcoming QR, I think it is a good buy for it's prospect for now.

Note: This post is not recommendation of buy or sell of a company shares, but only personal opinion.

Related Articles by Categories