SYS 13-04-2016

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Foundation Research|
Equities
13 April 2016
SYS PA Outperform
Stock price as of12 Apr Rs 56.1
Dec 2016 target Rs 100.5
Upside/downside % 79.1
12MPrice Objective Rs 104.5
- DCF based
IT Sector
Market cap Rs bn 6.2
30-day avg turnover US$m 0.2
Market cap US$m 59
Number shares on issue m 111
Investment fundamentals
Year end 31 Dec 2015A 2016E 2017E 2018E
Total revenue m 2,471 2,951 3,519 4,101
PBT m 418 624 838 1,121
PBTMargins % 16.93 21.16 23.82 27.34
Recurring profit m 410 574 764 1,033
Reported profit m 410 574 764 1,033
EPS rec Rs 3.7 5.2 6.9 9.3
EPS rec growth % 0.5 40.1 33.1 35.2
EPS rep Rs 3.7 5.2 6.9 9.3
EPS rep growth % 0.5 40.1 33.1 35.2
PE rec x 15.1 10.8 8.1 6.0
PE rep x 15.1 10.8 8.1 6.0
Total DPS Rs 1.3 1.5 2.5 3.0
Total div yield % 2.2 2.7 4.5 5.3
ROA % 14.6 18.1 19.9 22.2
ROE % 16.9 20.1 22.1 24.4
EV/EBITDA x 13.2 9.1 6.0 4.2
Price/book x 2.6 2.2 1.8 1.5
SYS PA rel KSE100 performance
Source: Bloomberg, Foundation Research, Apr 2016
(all figures in Rs unless noted)
Analyst
Khurram M. Arif Khurram.arif@fs.com.pk
92 21 35612290-94 Ext 335
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SYS KSE100
Systems Limited
Improving industry prospects to unlock
rampant growth potential
Initiate with outperform, TP set at Rs100.5/sh, 79% upside
We initiate coverage on Systems Limited (SYS) with an “Outperform” stance as the
company is on course to benefit from improving prospects of Pakistan’s IT exports,
expanding geographical footprint and public sector digitization & computerization. Impetus
to growth would also come from launch of its new product ‘OneLoad’. We set our Dec-16
TP at Rs100.5/sh as the company would deliver a 5yr EPS CAGR of 30.1%.
Improving outlook on IT exports
Improving law and order situation of the country, post operation Zarb-e-Azab, would
substantially improve the outlook of Pakistan’s IT exports (0.7% of GDP vs world avg of
1.9%). This shall be aided by relatively cheap labor and increasing government focus. We
believe SYS, a newer arrival at local bourse, provides an ideal opportunity to play on this
theme given its specialization in Business Process Outsourcing and IT Enabled Business
Solution. The company derives a major chunk of revenue from exports (80% of the topline).
Encouraging local market scenario
Besides, accelerated efforts by the Government on public sector digitalization and
computerization should also bode well for local IT industry. SYS, one of the premier IT
companies in Pakistan, is well positioned to capitalize on this phenomenon as evident from
Rs450mn worth of contract acquired in CY15 alone. SYS remains a key player in the
domestic market given its important role in first automation of federal budget making
process and the computerization of district account office and Pakistan Custom.
Strong geographical diversification
SYS, in recent years, has made steady strides to expand its geographical reach and reduce
its concentration risk. Against a negligible contribution in CY09/10, Middle Eastern
operations now account for 22% of the topline. In this regard, the company in 2013 setup a
wholly owned subsidiary, TechVista, in Dubai to increase its footprint in the Middle East,
and turning profitable would be a key value trigger. Additionally, SYS is branching out in
Australia, South Africa and Namibia that will increase company’s growth momentum.
Successful launch of OneLoad to provide immense upside
Through its subsidiary E-Processing System, SYS is set to launch its new product ‘OneLoad’
to capitalize on the booming E-commerce trend. The product is a one stop payment
platform that is designed to offer services at lower cost with strategic partners like Road
Runner, UBL Omni, BAFL. We have not incorporated the impact given its infancy stage.
Valuations
 We have employed DCF technique to value to SYS at Rs100.5/sh.
Key upside and downside risks
 Price catalysts: (1) Improve IT exports prospects, (2) TechVista turning profitable, (3)
launch of “OneLoad”, (4) extension in tax exemption on exports, (5) digitization of public
sector and (6) devaluation of Rs
 Key downside risks: (1) Political instability, 2) high employee turnover, and (3) loss of a
key customer.
PAKISTAN
REP-095

Systems Limited April 13, 2016
2 Foundation Securities (Pvt) Limited
Initiate coverage on Systems Limited; Outperform
We initiate coverage on Systems Limited with an “Outperform” stance and set our Dec-16 target Price at Rs100.5/sh, that implies
capital gain of 79%. The company is to deliver a 5-yrs earnings (CY16-20) CAGR of 30.1% on the back of (1) improving outlook on
IT exports and (2) strong geographical diversification against the backdrop of US$ denominated topline. Successful launch of its
new product ‘one load’ and extension in tax exemption to export revenue would provide incremental upside to our valuations.
Moreover, strategic alliances with top notch technology firms (including Oracle, IBM and Microsoft) to support its existing
infrastructure, further strengthens our conviction on the stock.
We have valued SYS on DCF based Methodology with following key assumptions (1) 4% annual Rs-US$ depreciation, (2) cost of
equity at 15.0% (10yr PIB: 8.0%, Beta: 1.08x), and (3) an average 9% increase in the average employee cost.
Fig 1: Valuation Break-up
CY17 CY18 CY19 CY20 CY21
Net Income 764 1,033 1,332 1,607 1,899
Add: Depreciation 157 168 183 204 227
Less: CAPEX (201) (238) (278) (318) (363)
Change in working capital (167) (168) (185) (175) (200)
Change in debt (0) (0) (0) (0) (0)
FCFE 553 795 1,052 1,317 1,564
Discounted CF 481 601 691 752 777
PV of cash flows 3,302
Terminal value 14,759
PV of terminal value 7,329
Total PV 10,631
Total Equity Value 11,126
Number of shares 110.7
Value per share 100.5
Source: Foundation Research, April 2016
Target Price Sensitivity
We have arrived at a required equity return of 15.0% through the Capital Asset Pricing Model approach. We have used beta of
1.08x based on peers trading history of last 3yrs. Moreover, we have taken a risk free rate of 8.0%, a market risk premium of
6.5%, which in our view is an adequate compensation for taking exposure in an emerging market like Pakistan.
Sensitivity analysis
Fig 2: Target Price sensitivity to TG and COE
Terminal Growth
2% 3% 4% 5% 6%
CostofEquity
13.0% 106.9 114.8 124.4 136.3 151.7
14.0% 97.3 103.7 111.2 120.5 132.0
15.0% 89.3 94.4 100.5 107.8 116.7
16.0% 82.4 86.6 91.6 97.5 104.5
17.0% 76.4 80.0 84.1 88.9 94.6
Fig 3: TP sensitivity to Rs-Depreciation
Rs-Depreciation TP
1% 55.2
2% 69.6
3% 84.7
4% 100.5
5% 116.9
6% 134.2

0%
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Philiphines
India
Bulgaria
SriLanka
Brazil
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Egypt
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China
World's average 1.9% of GDP
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Pakistan IT Exports/GDP
2005-15 Avg
Booming industry prospects aided by higher government
focus
#1) Better law & order situation to bode well for Pakistan’s IT exports
The improving security perception of the country, post ongoing Zarb-e-Azab operation, would significantly improve the dynamics
of Pakistan’s IT industry, in our view. Adverse travel advisory, particularly post 9/11, has made foreigners reluctant to travel to
Pakistan and thus, had been the single largest impediment to the growth of the industry exports. Though Pakistan’s IT exports
have shown a decent CAGR of 13% in the last 10-yrs (~US$2.0bn in FY15 versus US$657mn in FY05), it is still significantly lower
than the global average. Pakistan’s IT export as % of GDP is a mere 0.7% versus global average of 1.9%, whereas IT exports of
India and Philippines stand at 5% and 6%. Nevertheless, we see the industry to potentially cross US$6bn mark in the next 5yr as it
converges to global average.
Source: World Bank, FS Research, April 2016
Fig 4: IT exports finally starting to pick-up… (US$ mn)
Source: WB, Economic survey, FS Research, April 2016
Fig 5: … reflecting increased share in GDP…
Source: World Bank, FS Research, April 2016
Fig 6: …but still significantly below than global average
Source World Bank, FS Research, April 2016
Fig 7: Per Capita comparison reveals the same thing

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#2) Encouraging Local market scenario
Auction of 3G/4G technologies in 2014 has greatly improved the domestic technology landscape. In a span of 2-years, 3G/4G
subscribers have grown to 29.2mn, representing a density of 15%. The increase in 3G/4G subscriber’s base along with higher
broadband penetration has caused mushroom growth in the domestic E-commerce arena as evident by growing trend in online
retail platforms (such as OLX, Daraz.pk, Foodpanda, Zameen.pk, Pakwheel, Careem) and increased number of E-banking
transactions in Pakistan.
Besides, government’s efforts to digitize and computerize public sector records (KPK and Punjab govt recently computerized land
records – SYS won that contract) will further spur the growth in the sector, in our view.
Source: PTA, FS Research, April 2016
Fig 8: Sharp increase in 3G/4G Subscribers (mn users) ….
Source: PTA, FS Research, April 2016
Fig 9: broadband subscribers rising as well (mn users)
Source: SBP, FS Research, April 2016
Fig 10: Increasing E-banking Transactions (mn)
Source: SBP, FS Research, April 2016
Fig 11 : Rising use of Credit/Debit cards (mn cards)

1.5%
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#3) Government’s spending to unlock growth potential
To unlock the immense growth potential, the incumbent government has made efforts to stimulate growth in this sector. Where
the sector went out of favor in the previous govt tenure (as seen in Fig 12), the present government has increased PSPD
allocation to an average of Rs690mn for the sector in the last 3 budgets. Furthermore, spending on education has also increased
that would improve the proficiency of IT human capital. Besides, several initiatives have been taken by the Government (see Fig
14) to facilitate rapid expansion of the sector.
Fig 14: Government Initiatives for the revival of IT industry
Supporting Entrepreneurship
Plan 9 Tech incubator
Launched in August 2012, Plan9 is Pakistan's largest technology incubator that aims to facilitate technological entrepreneurship in the country by
providing a nurturing ecosystem for the sustainable growth of product based early stage startups with absolutely no equity.
Plan X Tech Accelerator
PlanX is a technology accelerator for mid-stage start-ups. During the 6-month acceleration cycle, selected tech-startups are empowered by providing
access to multiple funding channels, specialized network of mentors and global exposure. At the end of the cycle, they operate as high impact
businesses with 0% equity stake.
Plan Tech Hub
Launched in January 2014, Plan9 TechHub is a co-working space for freelancers in Pakistan. It is a platform where freelancers get an opportunity to
learn, connect and grow while doing what they love - Freelancing.
Capacity Building Initiatives
IT Academy
The IT Academy not only offers programs and certification courses in multiple areas of the IT field at subsidized rates but also organizes various
conferences and talks to promote skills and knowledge for a competitive advantage in the workplace.
Microsoft Initiative Program
Program constitutes of skill accelerator program, startup incubation program and product testing lab to enhance the skills of IT professionals,
developers, faculties and students.
Pak US Science and Technology Program
During FY15, phase-6 of Pak US Science and Technology Program was launched with a total commitment of Rs 250mn for a period of three year.
Laptop Local Assembly Line
First Laptops Assembly facility of Pakistan has now been established to help in knowledge transfer along with the technology; gradual job creations;
manufacturing of laptops and other appliances; and would also be helpful in enabling environment for the IT manufacturing industry in Pakistan.
Smart Universities
HEC has announced launch of Smart Universities Project to help students in their research and learning opportunities through ubiquitous access of
internet. As a pilot project, seven universities of the country (one from each province, Gilgit-Baltistan, AJ&K and Federal Capital) are being
transformed into Smart Universities.
Video Lecturing At Colleges
Under this pilot initiative, a total of fifty (50) colleges will be provided video conferencing solution and necessary training to operate the same.
Source: Budget Papers, FS Research, April 2016
Fig 12: Historical funds allocated for IT sector
Source: Economic survey, FS Research, April 2016
Fig 13: Spending on Education & as a % of GDP
Source: Punjab information Technology Board, Economic Survey, Foundation Research, April 2016

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Dubai
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Pakistan
#4) Increased number of enrolments in universities
Human capital is the single most important asset in the IT sector; hence, increasing number of enrolments translating into a more
competent work force that provides a strong hint about the prospects of the sector. During the last 15 years, number of
enrolments has increased to 1.8mn in 2015 from less than 0.2mn in 2001, depicting an annual growth of 21%. We see this trend
as favorable for the IT sector.
#5) Labor cost lower in Pakistan compared to
regional peers
Pakistan has cheap labor as compared to regional peers. Since
the major cost of revenue is driven by salaries (~70%-75% of
cost), it gives Pakistan a competitive edge over others.
An IT professional in Pakistan on average earns ~US$750 on
monthly basis versus ~US$1,200/3,400 in India/Dubai.
Interestingly, salaries expense as percentage of sales is
approximately similar in Pakistan when compared to India
which implies that contract price offered by Pakistani IT firm is
at a discount to India which is another positive.
Source: Economic Survey, Foundation Research, April 2016
Fig 15: 10 year glance of Pakistan’s Service export
Source: Payscale.com, FS Research, April 2016
Fig 16: IT Sector – Monthly Salary Comparison (US$)

25%
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IT/BPO Import (US$ bn)
IT/BPO share in total imports (RHS)
SYSTEMS well positioned to pocket from favourable
dynmaics
We believe Systems Limited (SYS), a relatively new player at the local bourse, provides an ideal opportunity to play on improving
outlook of the Pakistan IT industry as it has proven itself a success story, offering offshore and onshore IT services for the past 35
years. The company specializes in deploying and supporting ERP, business process management and complex software solutions
classified under four distinct service categories including (1) Business Process Outsourcing (BPO), (2) Consulting Services, (3)
Software & IT services and (4) Outsourcing Services.
#1) US centric business to benefit as the giant
recovers
The company launched its US operations in 1997 which has
become a major source of revenue in the past decade. Over the
years, the company has engineered high performing and cost-
effective solutions for its customers across diverse industries
including: banking, retail, insurance, distribution and
manufacturing, while building deep competencies in the
mortgage Industry.
BPO and IT related imports of US, accounts for 41% of its total
service imports (versus 28% in CY99), have grown by a mere 3%
post 2008 financial crisis versus an average growth of 13% in
CY00-07. Hence, we believe improved economic outlook of the
US would subsequently improve the outlook of BPO and IT
related imports.
Stable growth of US centric revenue along with 4% annual devaluation of Pak Rupee forms a pivotal base for our liking towards
SYSTEMS (see Fig 3 for valuation sensitivity with Rs-US$ parity).
Fig 17: Systems services classifications
Business Process Outsourcing Consulting Services Software & IT Services Outsourcing Services
Scanning, Indexing, and Archiving
Services
User Experience System Re-engineering Staff Augmentation
Data Entry Management Consultancy Database Administration
Information Security & Compliance Application Development &
Maintenance
Process Consultancy System Integration
Source: Company Reports, Foundation Research, April 2016
Source: Company Reports, FS Research, April 2016
Fig 18: SYS’s geographical revenue distribution
Source: US Bureau of Eco Analysis, FS Research, Apr-16
Fig 19: Increasing IT/BPO related services

15%
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Revenue Profitability Net margins (RHS) CY11-15 Avg Net margins (RHS)
#2) Strong geographical diversification to put the company in a sweet spot
Besides, the company in the recent years, has made steady strides in diversifying its geographical base. Though US remains the
major revenue generator for the company, there is an increased revenue contribution from the Middle East. The region now
contributes ~22% to company’s topline in CY15 versus a negligible in CY09.
Techvista; another potential charm: To expedite growth in Middle East, the company has established a wholly owned
subsidiary, Techvista, in Dubai in 2013. Still in the infancy stage the subsidiary is yet to make profit, but we believe capturing of
strong client base in the region will trigger the upside potential in coming years. During CY15, revenue from Middle East
operations has portrayed robust revenue growth of 38% YoY and the management expects the subsidiary to turn profitable in
2HCY16. Being conservative, our valuation reflects the subsidiary to turn profitable in CY18.
Furthermore, TechVista has also set up a subsidiary in Australia last year and has signed up with a large retail chain across
Australia – City Convenience Stores.
Entering the African market as well: Besides, the company is also branching out its operation in South Africa and Namibia that
will further provide impetus to profitability of the company.
#3) Profitability growth to leapfrog revenue growth
Overall, we expect the company to deliver 5-yrs (CY16-20) growth of 16.8%/30.1% in revenue/profitability versus 34.2%/22.3%
already witnessed in CY11-15. Earnings growth in last 5yrs did not catch up with the revenue growth as the company was in
expansionary phase (Increased no. of employees to ~1,876 in CY15 versus 1,150 in CY12) and as a result salaries expense as a
percentage of sales jumped to 60% in CY15 versus 50% in the preceding 4-yrs. We believe capitalization of skilled human
resources would start reflecting in the bottomline in the coming years thereby improving gross/net margins of the company to
40%/26% in CY16-20 versus 32%/16% in CY15 and 36%/23% in CY11-15.
#4) ‘OneLoad’ to provide further fire power
Systems limited through its 70% owned subsidiary (E-Processing system) is set to launch a new product “OneLoad” in Pakistan
which is currently in a testing phase at over 500 plus retail shops in Pakistan. Though we have not built “OneLoad” in our
valuations, we believe this could bring significant upside given its (1) exciting features offered at a relatively lower cost, (2)
strategic relationships with key private and public sector entities and (3) favorable demographics (77% of the Smartphone users
are from the age bracket 21 to 30, who are tech savvy & can use OneLoad). Furthermore, the company plans to expand its
retailer network to more than 30,000 in next 3 years.
Source: Company Reports, FS Research, April 2016
Fig 20: Revenue growth with margins normalizing (Rs mn)

Key features of the product are;
(1) Mobile top-ups - through which retailers will be able to top-up any mobile number of any mobile phone operator, i.e. a single
device and a single universal balance to top-up mobile phones of any operator.
(2) Bill payments
(3) Peer to Peer Transfer at lower cost of 2%,
(4) POS and E-commerce Payments and etc.
Key strategic partners are;
(1) NADRA
(2) Road Runner (Home delivery service provider - Lahore)
(3) UBL Omni
(4) Bank Al-Falah
(5) Key telecommunications companies
#5) Possible extension in Tax exemption
Currently the company is enjoying a tax saving of 1% in export revenue which is due to expire in June 2016. The initiative is taken
by the government to incentivize the industry to boost the export. Considering the position of current account we believe there
are higher odds of extension in tax exemption on export revenue. Nevertheless, being conservative we have not incorporated tax
extension in our valuations which is an upside risk to our call.

Fig 21: Systems Limited (SYS PA, Outperform, Target priceRs100.5)
Balance Sheet 2015A 2016E 2017E 2018E Profit & Loss 2015A 2016E 2017E 2018E
Property Plant & Equipment m 363 784 838 917 Net Sales m 2,471 2,951 3,519 4,101
Cash & ST investments m 751 495 867 1,371 Cost of Sales m 1,670 1,911 2,214 2,473
Trade & Ot. receivable m 1,160 1,371 1,618 1,864 Gross Profit m 801 1,040 1,306 1,627
Other Assets m 526 527 517 510 Admin & Distribution m 415 471 527 586
Total Assets m 2,801 3,177 3,840 4,663 Research and Development m 29 32 35 39
Operating Profit m 357 537 744 1,003
Long term Financing m 8 8 7 7 Other Operating Income m 89 104 116 147
Trade Payables m 263 314 374 436 Other Operating Expense m 24 13 19 25
Other Liabilities m 116 2 2 2 EBIT m 421 628 842 1,125
Total Liabilities m 387 323 384 445 Financial charges m 3 3 3 4
Pre-Tax Profit m 418 624 838 1,121
Common Equity m 1,107 1,107 1,107 1,107 -Taxation m 13 50 74 88
Retained Earnings m 896 1,332 1,930 2,687 Profit After Tax m 405 574 764 1,033
Other Reserves m 421 425 429 433 Profit attributable to owner m 410 574 764 1,033
Total Equity m 2,414 2,854 3,456 4,217 EPS(rep) 3.75 5.19 6.91 9.34
Liabilities + Equity m 2,801 3,177 3,840 4,663 EPS(recurring) 3.75 5.19 6.91 9.34
DPS 1.25 1.50 2.50 3.00
Quarterly performance 1QCY15 2QCY15 3QCY15 4QCY15 Key ratios 2015A 2016E 2017E 2018E
`
Net Sales m 547 605 519 801 Revenue growth % 28.5 19.5 19.2 16.5
Cost of Sales m 370 421 340 539 EPS growth % 0.5 40.1 33.1 35.2
Gross Profit m 177 184 179 261 Salaries exp % of sales % 60.1 58.5 57.1 55.3
Admin & Distribution m 80 118 110 107 Gross margins % 32.4 35.2 37.1 39.7
Research and Development m 10 7 7 5 EBITDA margins % 17.3 21.8 26.0 28.9
Operating Profit m 87 58 61 150 EBIT margins % 16.9 21.2 23.8 27.3
Other Operating Income m 21 51 24 - Net margins % 16.4 19.5 21.7 25.2
Other Operating Expense m - - - 31 Effective tax rate % 3.1 8.0 8.8 7.8
EBIT m 108 110 85 118 BVPS Rs 21.9 25.9 31.3 38.2
Financial charges m 2 2 (2) 1 Sales per share Rs 22.3 26.7 31.8 37.0
Pre-Tax Profit m 106 108 87 117 Payout ratio % 33.3 33.3 33.8 34.3
-Taxation m 3 5 (1) 6 Dividend Yield % 2.2 2.7 4.5 5.3
Profit After Tax m 103 103 88 112 ROE % 16.9 20.1 22.1 24.4
Profit attributable to owner 104 104 89 113 ROA % 14.6 18.1 19.9 22.2
D/E % 0.5 0.3 0.2 0.2
EPS(rep) 1.08 0.95 0.81 0.91 Price to sales x 2.5 2.1 1.8 1.5
EPS(recurring) 0.93 0.93 0.80 1.01 Price to Earnings x 15.1 10.8 8.1 6.0
Price to Book x 2.6 2.2 1.8 1.5
All figures in Rs unless noted
Source: Company data, Foundation Research, April 2016

SYSTEMSLImited
EP System
(70% Stake)
TechVista(100%
owned subsidy)
About the Company
Systems Limited is a state-of-the-art software house that primarily
specializes in providing Business Process Outsourcing and IT Enable
Business Solutions to its client for over 35 years. The Company was
incorporated on December 13, 1977 in Lahore and was listed on
Pakistan Stock Exchange (PSX) in February 2015. From 1977 to
1996 SYS primarily operated in the Pakistan market and in 1997
launched its services in US. In 2013, the company set-up wholly
owned subsidy TechVista in UAE.

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clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the
material at the same time.
Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors
which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially
affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in
interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative
instruments, to manage certain of these exposures.
Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this
research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation
Securities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
Recommendations definitions
If
Expected return >+10% Outperform.
Expected return from -10% to +10% Neutral.
Expected return <-10% Underperform.
Important disclosures:

SYS 13-04-2016

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