After NetSol, Avanceon, and The Resource Group, Systems Limited would be the fourth technology company to be listed on the stock exchange. The initial public offering of Systems Limited was scheduled to be held on December 5,, 2014 with the offer consisting of a total of 13 million ordinary shares.
This makes up almost 13 percent of total paid-up capital, with which the IT firm intends to generate at least Rs325 million. Initially, the price band decided for the listing was Rs25 -35 per share. However, the price cap was later changed to Rs40 per share.
The book-building portion of the offer comprised of 75 percent of the offering (i.e. 9.75 million ordinary shares), which was offered to institutional investors and high net worth individuals through book-building last week, whereas the remaining 25 percent of the offer (3.25 million shares) will be offered to the general public at a strike price determined during the book building process.
Being one of the last IPOs of 2014, and that, too, of a fast growing IT firm with global presence, the transaction has been perceived to attract good response in both the book-building process and the offer to the general public.
Founded in 1977, Systems Limited is engaged in the business of providing computing strategies and solutions like BPO and consulting services, software and IT services, and outsourcing services to both the government and private organisations. To its record, the IT firm has finished over 600 projects in various countries like Pakistan, Middle East, Africa, and the United States.
Looking at the earnings multiples, the offer seems attractive as well; while the earnings of the IT industry have been volatile in general, the firm’s relatively higher price-to-sales ratio implies a high future revenue growth. This can also be verified by System Limited’s 5-year sales CAGR of around 32 percent.
The firm has positive growth prospects: Domestically, Systems Limited has entered into new agreements with Nadra, SECP, HEC, etc. And on the international front, it has established a subsidiary company by the name TechVista in Dubai to address the mounting demand.
The growth momentum coincides with the firm’s listing plans; the purpose of this capital market transaction is to expand footprints in other geographic locations as well as develop Center of Excellence and solution offerings to support strong demand from various markets.
About Rs100 million of the funds generated are to be utilized for setting up sales presence and offices in new locations like Qatar, UAE, UK, KSA and South Africa. Another Rs100 million will be utilized for creating additional capacity offering in the same locations. Rs62.5 million each will be set aside for new solutions and cash flow support for revenue growth, respectively.
While the investors might be rushing to the listings, there is one significant downside for the Systems Limited IPO: The investors will be wary of the expiry of the tax-exemption to the sector in 2016, which will negatively impact industry’s growth. Exports of software, which normally make up majority of the sales of IT companies, are currently exempt from taxation till June 2016.
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NetSol TRG Avanceon Systems Limited
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Market Price (Rs) (Dec 4, 2014) 38.34 13.3 28.43 25.00 40.00
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FY14 FY14 CY13 CY14
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Price to earnings ratio (P/E) -5.44 -3.61 5.56 6.19* 9.9*
Price to sales ratio (P/S) 1.86 0.29 1.18 2.43 3.88
Price to book value (P/BV) 0.62 2.98 1.71 1.60 2.56
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Systems Limited:
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Sales growth (5-year CAGR) 32%
Earnings growth (5-year CAGR) 26%
Average target price ** 42
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* EPS annualised
** average of the three brokerage house target prices
Source: Systems Limited preliminary prospectus; Annual accounts;
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BR Research calculations
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