Disclaimer: The article below is the work of a participant of Fundamentals of Capital Market training. Sarmaaya.pk holds no liability for the recommendation mentioned.

Systems Limited is one of the premier IT companies listed in the Pakistan Stock Exchange. The IT sector on the PSX is one of the most profitable with a number of companies listed on the exchange. The sector is benefiting from the increasing demand for IT services in Pakistan. The sector is also benefiting from the government's focus on promoting the IT sector. In this detailed report we will look at the various aspects of the Systems Limited (SYS) on Pakistan Stock Exchange and determine whether it is suitable for investment in the short and long term.

In a Nutshell

• Analyst Background
• Macroeconomic Profile
• Company Profile
• Financial Analysis
• Business and Management Analysis
• Strength and Weakness
• Summary

Analyst Background:

The research was carried out by Arsalan Khalid, a participant in the Fundamentals of Capital Markets course by Ammar Yaseen.

Macroeconomic Profile:

• Pakistan is a third world import based economy which heavily relies on support from IMF and other countries to maintain dollar reserves.
• From time to time government bring initiatives to attract Foreign investor including overseas Pakistanis however due to heavy government ex penditures in non development areas this investment is slow
• Over-past 10 years PKR has depreciated against USD. Efforts from Govt to peg PKR against USD has not been too much successful like Middle East countries. This makes government securities less attractive to me as investor and gold is more preferable.

In such case, companies having strong brand value and export-based business are good choice for retail investors, coupled with gold based mutual funds.

Advice to new retail investors:

I will recommend to new retail investors to invest in following considering the macroeconomic profile detailed below:

• Systems Limited stock
• Meezan Bank stock
• Meezan Gold fund
• Mari Petroleum Limited

Note: As support to my advice I am just pasting some screenshots. However, I have done fundamentals analysis in support of my advice. It is largely based on data from investing.com. Key factors I have considered in my analysis: Should be an index tracker company, Market cap among top 20-30 companies, PE ratio, profitability.

Cashflows, business models etc. from financials are also checked.

Reason:

• Index tracker company
• Systems Limited share price is constantly on a higher trend since 2016, even dip at covid times is quite less. This shows that smart money is comfortable with the business model and fundamentals of the company.

Reason:

• KMI 30 company
• Meezan bank is to Pakistan, like Coca-Cola is to the world i.e., strong brand value. Hence although Meezan Bank may undergo share price decline as the world gets financial shocks from USA Europe financial turmoil, Meezan bank share price is likely to go up in the long term. The brand value can be seen in constant price rise since 2015.

Reason: In addition to being a global commodity, gold enjoys strong brand value in Pakistan. Added advantage is the depreciating PKR currency over the long term. This is the right time to invest in the mutual fund as the USA has initiated a Quantitative tightening policy lowering the gold price in Pakistan.

Reason:

• KMI 30 company
• Oil consumption within Pakistan is not coming down any time sooner being third world country. Further, the share price has bounced back really good after COVID unlike other oil-based business companies in Pakistan. This shows smart money has confidence in business model of the company

Initial analysis of company:

Based on a review of Investing.com. Company shows following plus points to invest in for long term

• Company is part of KSE 100 index
• Market cap is good, among top 10
• Revenue volume is good, among top 10
• PE ratio is although on higher side (not a plus point)
• 3 years profit %age is close to 400%
• 1 year profit %age is good

Financial Analysis

Growth & stability Factors:

• Without going into detailed calculation we can see that 3 years average is better than 5 years average for Revenue, Operating profit and Net profit. This means operating margin and net profit margin is improving.
• 5 years data is not available for cashflows, only 2 years data. Based on this data Cumulative cash flows for two years is less than cumulative consolidated profit & loss

Valuation Factors:

The above charts are taken from investing.com and trading.com.

• First chart from trading.com shows that stock is currently Rs. 32 less than the historical price of Rs. 500. Hence stock is between 5% - 10% discount currently
• Second chart from trading.com, it shows that price is bouncing back from the 200 days weekly average line, hence stock is in buy trend.

Share price has performed historically better than KSE 100

Business and Management Analysis

Business Factors:

Major revenue is coming from USD while, major cost is PKR based.

Revenue is balanced considering Geography and sector information.

Management Factors:

• Greatest shareholding is from directors and ex-staff together, which shows staff confidence in company business model
• 15% holding is from foreign investor, which again shows foreign investor confidence in the company
• Dividend payout has gradually increased. This is reflected in current ratios and profitability ratios as capital is not re-invested in business. Those ratios could have been better if the company would have invested the capital back in business. Companies could have lower gearing in such cases. But despite this factor company financial results are good

Strength and Weakness

Strengths:

• Historical trend of smart money attraction
• Good business model in terms of revenue geography and sector
• Good fundamental ratios, although a bit declined, but 3 years average is better than 5 years 4. Share price at discount

Weaknesses:

• Cumulative cash flow from operations is less than cumulative net profit
• Should have expanded more into USA & Europe than Middle East

Summary

Overall, the Company is good from Long term perspective