Outsourcing industry key area for growth

  • Business
  • Thursday, 12 Oct 2006

PETALING JAYA: The shared services and outsourcing (SSO) industry is viewed as a key growth area for the Malaysian economy and this comes as no surprise given that the country is ranked as one of the top three preferred SSO locations in the world. 

The ranking is given by foreign management consulting firms including AT Kearney, McKinsey, Deloitte and Frost & Sullivan. 

While cost reduction is generally the major impetus for outsourcing, factors such as improving competitiveness, focusing on core competencies and improving customer satisfaction have become increasingly important for businesses. 

OSK Research Sdn Bhd said large corporations in Malaysia were recognising the value of outsourcing and that the long term growth prospects of the industry was promising given that many organisations were now adopting SSO in their business. 

The research house has initiated coverage on three listed SSO companies - Scicom (MSC) Bhd, Advance Information Marketing Bhd (AIM) and Efficient E-Solutions Bhd - which it views as niche players in the industry. 

Malaysia is ranked as one of the top three preferred shared services and outsourcing locations.

Outsourcing advisory firm NoeIT ranks Scicom as one of the world's top 100 outsourcing firms. The Mesdaq listed company has enjoyed international success by leveraging on Malaysia's multilingual workforce and cost competitiveness.  

Scicom is one of the biggest contractors for Nokia's call centres, currently handling the multinational's call centres in India, Asia Pacific, US, Middle East and Africa. In October last year, it secured a three-year RM25mil technical help-desk contract from Singapore's Singtel. 

OSK Research finds Scicom's earnings growth, dividend yield and return on equity very attractive by worldwide industry standards. 

“Being the best outsourced call centre in Malaysia, Scicom should be able to continue attracting the interest of foreign funds, which stood at approximately 12% as at Aug 1,” the brokerage said in a report on the SSO sector released yesterday.  

The brokerage has revised its target price for the stock to 68 sen and is maintaining its buy call due to the company's strong earnings growth, 50% dividend payout policy and strong order book for the next two years. 

OSK Research said AIM was one of only two companies in Malaysia offering end-to-end managed and outsourced loyalty programmes.  

It cited a Frost & Sullivan report valuing the Malaysian loyalty programme market in 2005 at RM2.05bil, projecting it grow at a compounded annual growth rate (CAGR) of 9.78% to RM3.53bil by 2010. 

The report expects more than 60% of all loyalty programmes over the next five years to be outsourced. It estimated the revenue of managed loyalty programmes to record a CAGR of 15.2% from 2006 to 2010. 

The brokerage said AIM's focus on the onshore outsourcing business had helped it capture more than 70% share in the local end-to-end managed loyalty programme industry.  

It said although AIM did not have a fixed dividend policy, it was the intention of the company's board to distribute not less than 40% of its net profit as dividends for financial years ending 2006 and 2007.'' 

The brokerage believes the payout ratio, based on current share price, could translate to a high gross dividend yield of 7.3% and 7.9% for FY 2006 and 2007 respectively. 

Although the brokerage has a neutral call on Efficient, it nevertheless believes the data and document processing (DDP) player was a company to watch over the next few quarters. 

The company is said to be one of the leading industry players serving most of the big companies in the banking, stock broking and life insurance industries. 

The brokerage noted that the company's revenue was driven by long-term contracts and its existing contracts were not expected to expire until early 2008. 

“Due to high switching cost and long migration process, existing customers are expected to renew contracts with Efficient,” it said, adding that the company management expected to achieve revenue and net profit growth of at least 20% for the financial year ending Dec 31. 

OSK Research expects the contribution from the company's venture into the “scan and archive” business to be minimal in 2006 and 2007. 

 SCICOM :  [Stock Watch]  [NewsAIM :  [Stock Watch]  [NewsEFFICEN :  [Stock Watch]  [News]

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