Student assignment: Report to the potential investors in Scicom (MSC) Berhad

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Executive summary

 

Surviving the US led global financial crisis, Scicom (MSC) Berhad has come back with a strong rebound in term of various financial ratio and index, again we are on the track of profitability and business growth. In the end of last year, we have further the penetration of the local market by joining hand with Maxis in obtaining the contracts to outsource the company’s new fiber home internet products. With the admirable future for the Malaysia fiber internet service, we are expecting an 35% net profit growth this financial year. Read this report, you will not hesitate to be part of our business.

Assumptions

 

Assume that in Scicom (MSC) Berhad, the financial year begins on January 1-st and ends on December 31 of the same year for the convenience of doing the budget proposing the budgeting cash flow as well as the budgeting statement of financial performance and budgeting statement of financial position and the most recent available financial reports would be 2011 and 2010 financial reports based on which the most recent financial ratios could be calculated.

 

Assume that Scicom (MSC) Berhad is going to take over a new customer service outsourcing project (inbound and outbound call center service) with the client of Maxis Bhd in its home fiber internet product lines. And the project was signed in the end of last year while previously the customer services of the Maxis home fiber internet products is handled by one major competitor of Scicom (MSC) Berhad. With an initial contract term of two year and the great potential of the Malaysia fiber internet market, Scicom (MSC) Berhad is eager to demonstrate its professionalism and quality of service in the handling of the customer service in this particular section of the telecommunication industry. Therefore, investment in the hardware and software systems as well as in hiring of good labors and management teams in offering quality service would be necessary in order for the company to obtain the further contracts after the ending of the two years initial contract terms as agreed in the contract signed. To do this, this report intended to the potential investors would be used to illustrate the current financial performance as well as the sound prospects of the profit and market share as brought in by the new projects and persuade the investors to invest the funding in the company to support the future business growth.

 

 

Content page

Executive summary………………………………………………………………………………………….. 1

Assumptions……………………………………………………………………………………………………. 2

Report to the potential investors in Scicom (MSC) Berhad…………………………………… 4

  1. Company profile……………………………………………………………………………………….. 4
  2. New project details……………………………………………………………………………………. 4
  3. Financial performance………………………………………………………………………………… 5

3.1      Financial ratio analysis based on 2011 & 2010 company annual reports…… 5

3.1.1     Company Profitability……………………………………………………………… 5

3.1.2     Company Efficiency……………………………………………………………….. 6

3.1.3     Liquidity……………………………………………………………………………….. 6

3.2      Financial statements…………………………………………………………………………. 7

3.2.1     Budgeted statement of financial performance (2011-2012) (Profit and Loss Statement (P&L))    7

3.2.2     Budgeted statement of financial position (2011-2012)……………….. 11

3.2.3     Cash Budget for 12 months……………………………………………………. 13

Reference……………………………………………………………………………………………………… 16

Appendix Company financial ratios…………………………………………………………………. 17

 

List of figures and tables

Table 1 The internet usage report in Malaysia from 2000 to 2010……………………. 5

Table 2 The internet usage report in Singapore from 2000 to 2010………………….. 5

Table 3 Performance elements and KPI targets in 2011……………………………….. 10

Table 4 Performance elements and KPI targets in 2012……………………………….. 11

Report to the potential investors in Scicom (MSC) Berhad

 

1.        Company profile

 

Base in Kuala Lumpur, Scicom (MSC) Berhad is a Malaysia local service company dedicated to the contact outsourcing service since its foundation in year 1997. With about 15 years’ operation and continual efforts, Scicom (MSC) Berhad has become one of the most famous and largest service providers across various industries. The company’s “Customer Focused Business” strategy builds on its expertise in consulting, technology, education and outsourcing to help clients perform at the highest levels so they can create sustainable value for their customers (scicom-intl.com 2011). Surviving the impacts from the 2008 to 2009 financial crisis and the sudden fall of the Nokia as the world’s largest mobile phone producer (Nokia is a major client of the company), the company has again obtained its growth momentum in the last two financial years and sourcing more new projects to support this growth trend. And one of the major projects is the customer service outsourcing of the home fiber product lines with the client of Maxis Berhad which is expected to ensure the profit and revenue growth of the company in the coming few years. To begin with, let us look at the new project details followed by the financial performance analysis of the company.

 

2.        New project background

YEAR Users Population % Pen. Usage Source
2000 3,700,000 24,645,600 15.0 % ITU
2005 10,040,000 26,500,699 37.9 % C.I.Almanac
2006 11,016,000 28,294,120 38.9 % ITU
2007 13,528,200 28,294,120 47.8 % MCMC
2008 15,868,000 25,274,133 62.8 % MCMC
2009 16,902,600 25,715,819 65.7 % ITU
2010 16,902,600 26,160,256 64.6 % ITU

Table 1 The internet usage report in Malaysia from 2000 to 2010

Source: internetworldstats.com 2011

 

YEAR Users Population % Pen. Usage Source
2000 1,200,000 3,263,209 36.8 % ITU
2006 2,421,800 3,654,103 66.3 % ITU
2009 3,370,000 4,657,542 72.4 % ITU
2010 3,658,400 4,701,069 77.8 % ITU

Table 2 The internet usage report in Singapore from 2000 to 2010

Source: internetworldstats.com 2011

 

Launched on 31 March 2011, the Maxis Home Fiber Internet is a true fiber optic connectivity to home with speeds of 10 Mbit/s and 30 Mbit/s, the availability of the service is based on the coverage of the TM UniFi service. With continual fast growth of the internet users in Malaysia in term of enhanced internet penetration rate from 2000 to 2010, and its position being lagged behind by its neighboring Singapore as well as the government’s ambitious Economic Transformation Programme which is a focused, inclusive and sustainable initiative that is targeting at transforming Malaysia into a high-income nation by 2020 (pemandu.gov.my 2011). Under such background, our new project in the fiber product will also have a growing market.

 

3.        Financial performance

 

3.1    Financial ratio analysis based on 2011 & 2010 company annual reports

 

3.1.1            Company Profitability

 

In term of profitability, various profitability ratios that access our business’s ability to generate earnings as compared to its expenses and other relevant costs have all shown that the company was performing well in this last financial year. The total revenue grew from 2010’s RM 106,575,825 to last year’s 128,3030,773 contributing to a revenue growth of 20.4 per cent for the company while this indicator was only -1.1% in the previous financial year of 2010. And considering the cost factors, the PBT[1] growth also reach an exciting 48.8 per cent in the last year compared to 39.0 per cent in 2010 while similarly the net profit growth rate increased from 39 percent to 51.7 per cent for the company. And because of the company’s improved overall profitability in the last financial year the basic earnings per share reached 4.49 sen, almost double from the previous financial year’s 2.85 sen indicating that the company had allocated sufficient amount of earning to each outstanding share of the company’s stock.

 

3.1.2            Company Efficiency

 

Efficiency ratios measure how effectively a company utilizes the assets, as well as how well it manages its liabilities. These ratios include inventory turnover, accounts receivable turnover, accounts payable turnover and total asset turnover. The most concerning variable is the asset turnover. And in term of asset turnover which is also known as the asset turnover ratio, calculated by dividing sales in ringgits by assets in ringgits, in Scicom it grew from 1.88 times in 2010 to 1.94 times in the last financial year suggesting that the company’s efficiency at using its assets in generating revenue was enhanced and more money was brought in through the business practices in term of each ringgit asset owned by the company. On the other hand, in term of the net return on equity the improvement is more significant as the digit had grown from 0.19 times to 0.25 times.

 

3.1.3            Liquidity

 

A major concern of any analyst is whether a business or a company will be able to meet its maturing financial obligations, while a full liquidity analysis requires the preparation of a cash budget which would be elaborated in the financial statement section, here we probe into several liquidity ratios in the latest financial years. In term of current ratio which is used to determine the short term liquidity of the company by  used to determine the short term liquidity of the company, the ratio also witnessed an increase from 2010 financial year’s 6.69 times to the 8.07 times in the last financial year. This means that the current assets of the company which include cash, prepaid insurance, cash equivalents, account receivable and inventory and etc, are sufficient and therefore there would not be any plausible worries that the company could not be capable to pay offs its short term liabilities via available current assets. In another word, the company is in a better liquidity position because of the improved current ratio. And in term of cash ratio which is a measure of the amount of cash available to offset current debt, it also increased from 12.1 per cent to 26.4 per cent demonstrating the company has more cash to cover the maturing short term liabilities, and also because the company has more cash on hands, it reduces the chance and necessity to sell the current assets to offset pay off the debts which is less preferable method to any business to cover the liabilities because it reduces the assets in a less economical way.

 

3.2    Financial statements

 

3.2.1            Budgeted statement of financial performance (2011-2012) (Profit and Loss Statement (P&L))

 

 

 

 

  2011 2012
Revenue 128303773 160379716.3
Other operating income 13195 16493.75
  128316968 160396210
Operating expenses  
–          Depreciation of plant and equipment 5413624 5813624
–          Employee benefit costs 91450488 116950488
–          Impairment loss 9950 10050
–          Maintenance expenses 834702 1007702
–          Management fees 28019 33019
–          Rental expenses 8494576 8494576
–          Telecommunication and utilities expenses 3621465 4020000
–          Travelling expenses 1209265 1210400
–          Other operating expenses 2927170 3427000
  113,989,259 140966859
Profit from operations RM 14,327,709 19429351
Net finance (cost)/income  
–          Finance income 64,971 95,000
–          Finance costs (55,771) (90,771)
9,200 4229
Share of profit of the jointly controlled entity 0 0
Profit before Taxation 14,336,909 19433580
Taxation 295,291 400264
Net profit for the financial year 14,041,618 19,033,316

 

With the implementation of the new projects this year’s budgeted revenue will reach 160,379,716 with an year on year growth of 25 per cent compared to that of the last financial years, and while the revenue foresees a rapid growth, we also propose several key changes to control the cost that would be incurred. First of all, we will encourage our clients to use more e-conference instead of sending out staffs for long travels and visiting to reduce the travel cost as well as making the management to focus more on their jobs; secondly, we will redesign the current office layout to make the working environment more open and accommodate more seats. Also, the space of the rooms of the management office will be reduced and redesigned in an open environment to encourage free communication between the employees and the management. The redesign of the office environment will eliminate the necessity to rent a new floor for the new projects. Therefore the rental costs would be maintain as unchanged. Thirdly, for the new projects there would be a need for new management team. This time, we will encourage an internal promotion to reduce the recruitment costs. In addition, we are about to control the total management fees to about RM 3,3000. And also the internal promotion which will accounts for about 70 per cent of the total new management team will be anticipated to motivate the employees to work to their potential in particular for those who are working hard all the time for a chance of promotion. We will let the current employees know this information long before the start of the recruitment to maximize this positive effects.

 

While on hand we are controlling the operating cost, we also investing heavily on our core human resource: the call center agents. We will increase the incentive pay and sale bonus to the staffs for them to perform to their potential and make our customers and clients satisfied and we must exceed our clients’ expectations for them the continual the cooperation relationship after the end of the current contracts. And therefore in term of the employee benefit costs which account for the largest proportion of the operating expenses, last year’s digit is 91450488, while the revenue is anticipated to grow by a 25 percent, we will allow about 27.88% increase in the current financial year. And the allowance will be targeting to ensure the provision of better customer service in term of an improved KPIs[2] performance. By doing all these, we are expecting that the net profit for the financial year will increase significantly from the previous RM 14,041,618 to about RM 19,000,000 through a 35.55% growth. And in term of operation, we have detail strategies to facilitate the realization of the targets. For example, to ensure that our investment on our talented human resource will pay off, we are increasing our operating performance requirements as illustrated in the table below.

Performance elements and KPI targets in 2011
QUIZ/CM S. hours Inbound Call Call/Hours Average Handling Time OCC% Util%
> 80% 8.0 Hrs 75 10.5 6 >= 100% >50%
After Call Work per call Break Time Call Back Time Backup Team Manager Training and Coaching Time Other Authorized Activities TTL AUX
< 1 MIN < 30 MIN < 10 MIN 0 < 25 MIN With approval <=10

Table 3 Performance elements and KPI targets in 2011

 

Performance elements and KPI targets in 2012
QUIZ/CM S. hours Inbound Call Call/Hours Average Handling Time OCC% Util%
> 90\5% 8.0 Hrs 75 10.5 5.5 >= 100% >60%
After Call Work per call Break Time Call Back Time Backup Team Manager Training and Coaching Time Other Authorized Activities TTL AUX
< 45 sec < 30 MIN < 9 MIN 0 < 30 MIN With approval <=9

Table 4 Performance elements and KPI targets in 2012

 

There are several changes implemented in the KPIs setting to boost better performance, higher service quality and higher working efficiency in the work place among our employees. First of all, in term of the core KPI in the call center industry, the AHT, i.e. the average handling time, we are reducing the target from 6 minutes per call on average to 5.5 minutes, this target based on our observation and tests are workable and will be enhancing our work efficiency and overall performance by at least 20% according to our estimations because little changes in the AHT will result in a series of changes in the operating practices. Secondly, we are increasing the training time limit from 25 minutes per day to 30 minutes per day to provide better training and education to our employees which is closely related to their final and later performance. Thirdly, we have level up the utility percentage from 50% to the current 60%.

 

3.2.2            Budgeted statement of financial position (2011-2012)

 

Non-current assets 2011 2012
Plant and equipment 7932704 8963956
Investment in subsidiaries 1069986 1176985
Investment in jointly controlled entity 1 1
Deferred tax assets 308088 308088
  RM 9310779 RM 10449029

 

While the amounts of the Deferred tax assets and Investment in jointly controlled entity will not change in the current financial year, the total non-current assets will increase from last year’s RM 9,310,779 to this year’s RM 10,449,029 with a 12.23 per cent growth because of the increases in the categories of Plant and equipment and Investment in subsidiaries. On one hand, the company increases the investment in the subsidiaries because it has more attributable profits and the company is going the enhance its control over the subsidiaries through the buying back of more shares of its major subsidiaries, in particular in one of its fastest growing subsidiary, a consulting service firm located in Cyber Jaya. And on the other hand, another strategic decision is to upgrading the current hard phone equipments, computer equipments as well as the server equipments to provide better call center service to our new clients.

 

Current assets 2011 2012
Trade receivables 31087661 34818180
Other receivables 4134186 4630288
Amounts due from subsidiaries 4109884 4603070
Tax recoverable 80546 90211.52
Cash and cash equivalents 17459900 19555088
  RM 56,872,177  RM 74,145,867

 

With an enlarging business scale, we expect that there would be an approximately 30.37 per cent increase in term of the Current Assets not only because of the growth of the Non-current assets but also because of the growth in term of the current assets such as the items of Trade receivables, Tax recoverable and Cash and cash equivalents.

  2011 2012
Current liabilities    
Trade and other payables 7046694 7755435
Borrowings (secured and interest-bearing) 0 0
  7,046,694 RM 7,755,435
Net current assets RM 49,825,483 RM 66,390,432
Non-current liabilities    
Borrowings (secured and interest-bearing) 0 0
Deferred tax liabilities 0 0
  0 0
Net assets RM 59,136,262 RM 76,839,461

 

3.2.3            Cash Budget for 12 months

  Jan Feb Mar Apr May Jun
Beginning cash balance 17459900 17745620 18031341 18317061 18602781 18888501
Cash from operations 1619113 1619113 1619113 1619113 1619113 1619113
Total available cash 19079013 19364733 19650453 19936173 20221894 20507614
Less            
Capital expenditures 35400 35400 35400 35400 35400 35400
Interest 2300 2300 2300 2300 2300 2300
Dividends 0          
Debt retirement 132800 132800 132800 132800 132800 132800
Other 1387600 1387600 1387600 1387600 1387600 1387600
Total disbursements 1558100 1558100 1558100 1558100 1558100 1558100
Cash balance (deficit) 17520913 17806633 18092353 18378073 18663794 18949514
Add            
Short term loans 224707.7 224707.7 224707.7 224707.7 224707.7 224707.7
Long term loans 0 0 0 0 0 0
Capital stock issues 0 0 0 0 0 0
Total additions 224707.7 224707.7 224707.7 224707.7 224707.7 224707.7
Ending cash balance 17745620 18031341 18317061 18602781 18888501 19174222

 

  Jul Aug Sep Oct Nov Dec Total
Beginning cash balance 19174222 19459942 19745662 20031382 20317102 20602823 228376336
Cash from operations 1619113 1619113 1619113 1619113 1619113 1619113 19429351
Total available cash 20793334 21079054 21364775 21650495 21936215 22221935 247805687
Less             0
Capital expenditures 35400 35400 35400 35400 35400 35400 424800
Interest 2300 2300 2300 2300 2300 2300 27600
Dividends           1333455 1333455
Debt retirement 132800 132800 132800 132800 132800 132800 1593600
Other 1387600 1387600 1387600 1387600 1387600 1387600 16651200
Total disbursements 1558100 1558100 1558100 1558100 1558100 2891555 20030655
Cash balance (deficit) 19235234 19520954 19806675 20092395 20378115 19330380 227775032
Add             0
Short term loans 224707.7 224707.7 224707.7 224707.7 224707.7 224707.7 2696492
Long term loans 0 0 0 0 0 0 0
Capital stock issues 0 0 0 0 0 0 0
Total additions 224707.7 224707.7 224707.7 224707.7 224707.7 224707.7 2696492
Ending cash balance 19459942 19745662 20031382 20317102 20602823 19555088 230471524

 

4.        Concluding remarks

With the analysis above, we are confident that our new project would provide strong momentum for further growth of our business and also the health financial ratios also indicate that our company has sound profitability as well liquidity and efficiency to offer sound payoff for your smart investment decision in Scicom.

Reference

 

internetworldstats.com 2011. Malaysia Internet Usage Stats and Marketing Report. Accessed 6th July 2012 [online] available: http://www.internetworldstats.com/asia/my.htm

 

pemandu.gov.my 2011. Economic Transformation Programme. Accessed 6th July 2012 [online] available: http://etp.pemandu.gov.my/default.aspx

 

scicom-intl.com 2011. Corporate> About Us> Overview.  Accessed 6th July 2012 [online] available: http://www.scicom-intl.com/Corporate_Overview.html

Appendix Company financial ratios

 

 

[1] PBT= Profit before tax

[2] Key performance index