This article first appeared in The Edge Malaysia Weekly on July 8, 2024 - July 14, 2024

THE management of Scicom MSC Bhd (KL:SCICOM) is waiting for the company to bag its first large-scale border control and immigration concession, after being shortlisted in as many as five countries.

The company has been looking to secure such government technology (gov-tech) contracts for some time now but has only managed to win relatively small jobs so far, which have had little impact on its bottom line.

In an exclusive interview with The Edge, Scicom executive director and CEO Datuk Sri Leo Ariyanayakam says the award of this gov-tech concession would be a game changer for the company, which has morphed over the past 10 years — from having a presence solely in the business process outsourcing (BPO) sphere to pivoting to become a managed services company.

On being shortlisted for border control and immigration concessions in five countries, Ariyanayakam says: “We are bidding for such jobs in Sri Lanka, in various African countries, in the South Pacific, all over the place … Our chances are good, because we have a great product. We have a very great way to go to market because we do it on a PFI (private finance initiative) basis; the client doesn’t come up with a cent. We spend tens of millions [building the immigration system]; we will make it work. Then we get paid on a transaction basis, and we even split the revenue so the client makes money as well.”

The results of the tender in Sri Lanka are slated to be out in a couple of months. Ariyanayakam, a Sri Lankan national, is tight-lipped about the tenders, but The Edge understands that Scicom has also been shortlisted for one in Fiji.

Ariyanayakam is aware of the difficulty in landing such huge, lucrative jobs, as the company has been pursuing such contracts for several years to little avail.

“Over the last 10 years, we have invested in building an R&D (research and development) centre, built all these systems. We spent a lot of money on it, tens of millions ringgit,” he says.

“Now, we have gone to market with this product … The biggest problem with going to the market with this is they ask who you have done this for … So, [having a track record] has been a little of a hurdle for us.

“We’ve been knocking on doors for a long time. We have been able to get small bits of business from various governments; so, we are building a reputation now. We are delivering something in Sri Lanka’s immigration, we have gone in for umpteen tenders all over the world, including all the way from Fiji to Malaysia, and everywhere … So, [not having a track record] is our dilemma.”

In Sri Lanka, Scicom is one of two companies shortlisted for the immigration and border management system.

Asked whether he is hopeful of landing it, Ariyanayakam laughs and says, “Hope is not a business strategy.

“The problem with these types of contracts is that they are usually a result of government policy, and governments can and do change. And because it’s a long sales cycle, it’s usually what happens … The shortlisting is not the issue. You know the saying — second place is first place loser.”

Scicom’s pivot to managed services began when it entered into an agreement with Education Malaysia Global Services (EMGS), a company under the purview of the Ministry of Higher Education Malaysia that is tasked with promoting Malaysia as an international education hub. It also manages the movement of international students, including facilitating visa processing.

For 9MFY2024, Scicom chalked up a net profit of RM20.71 million on the back of RM179.5 million in revenue. For FY2022, Scicom raked in RM25.03 million in net profit against RM188.34 million in revenue.

To its credit, Scicom has a clean balance sheet, with cash and bank balances of RM14.71 million and investment in cash funds of RM22.28 million, with no borrowings.

A catalyst that could lift the company to greater heights, the gov-tech contract, has thus far been elusive.

In July 2019, Scicom was touted as being hopeful of winning a contract to track foreign workers in Malaysia, but it did not take off. The company also made a bid for other governmental processing systems, including the multibillion-ringgit Integrated Immigration System with the Ministry of Home Affairs in May 2018 as well as for its successor, the National Integrated Immigration System, but it has since dropped out of the running.

“We built the first end-to-end student management system for EMGS; then it’s just a hop, skip and jump to build a worker management system. Malaysia has so many disparate systems; there are five or six companies with disparate systems, all working for the government.

“When we built the EMGS, the entire system — all the functions — were in one integrated system … We completed it 10 years ago. Now, the progression is we are going into identity management systems,” Ariyanayakam says.

On Scicom’s inability to win jobs on the local front, he says: “It’s been very challenging in Malaysia. There are several issues but it has to be our fault as well, as we are not going into the market positioning ourselves, maybe. We should be acknowledged as being able to do complex, large-scale enterprise and government deals because we know how to manage thousands of people. We have the track record for it, we have the money for it, we have zero debt, we have a great track record with government as well.”

According to Ariyanayakam, Scicom’s BPO business fetches decent margins of at least 12% but the gov-tech business is “much more significant than our traditional business, BPO”, but he declines to give details.

Scicom’s aim is to secure a large contract, which could snowball and result in more contracts in a similar sphere.

“Over the next couple of years, we are going to be able to implement some of these big jobs … In the span of the next two years, we will have three big jobs, which will look at quadrupling our profit.

“I don’t really care about revenue so much; I care about bottom line. Top line is for vanity; bottom line is for sanity,” Ariyanayakam laughs.

For the longest time, Scicom has been perceived as a dividend stock, churning out steady payouts to shareholders. The stock has a dividend yield of 7.84%.

In FY2023, the company paid out a total of eight sen in dividends, or two sen a quarter, with a total payout of RM28.44 million. In FY2022, it paid out RM23.1 million, or 6.5 sen.

With earnings in 3QFY2024 tapering off, however, Scicom’s shares have come under pressure. In the quarter under review, it posted a net profit of RM6 million on the back of RM54.29 million in revenue, down from RM7.32 million and RM56.78 million respectively for the corresponding period a year earlier.

“You know, it’s a cyclical thing. Sometimes, the numbers come down, or we are just organising ourselves, so the numbers came down by a little more than one million in the last quarter — we made only RM6 million in net profit. So, we decided we won’t pay out more dividends than we made,” Ariyanayakam explains.

From a dividend of two sen, Scicom reduced its payout to 1.25 sen, which resulted in its share price slipping more than 17% from mid-May, when it was about RM1.12, to close at 92.5 sen last Friday, valuing the company at RM328.8 million.

Affin Investment Bank, the only research house that covers Scicom, gave it a “hold” call, with a target price of RM1.10. 

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