News Article -- July 22, 2002
CSA sees better performance
(source : The Edge Malaysia)by Lee Chui Yu
Last year was tough for technology-related companies like Computer Systems Advisers (M) Bhd (CSA). Competition intensified and corporates spent less on information technology (IT). CSA's net profit slipped 14 per cent for the financial year ended March 31, 2002.
"IT services in the region are the most competitive and the least protected. Of course there is some protection [from competition] in government projects, but even this is crumbling," says executive director Peter Yong.
"After the dotcom bust and US global economic tailspin, corporates are looking a lot harder at their return on investment on every dollar spent," he says.
Still, the next two financial years may turn out to be better for the company. For one thing, Yong explains, the economic environment is improving, and CSA is striving hard to build new niches.
"We believe there will be growth... the environment will improve incrementally, rather than by leaps and bounds," he says. Thus the company's bread and butter — its systems integration (SI) business — should see some growth in financial year 2003.
But most of the excitement should come from a new acquisition, and the expansion of CSA's services division, says Yong. The company plans to leverage on parent company CSC Computer Sciences International Inc (CSC)'s global client list and Malaysia's competitive advantage in this field. CSC is a Fortune 500 company.
CSA hopes that more customers will be interested to outsource their IT work.
"It's significant from the financial perspective and also in line with our group strategy to build hub services," explains Yong. "Cost pressures from the US are forcing more and more global companies to move their support services to countries like Malaysia, where operational costs are significantly lower."
"[Malaysia systems integrators] may do well today, [but] as market players become more global, people will come to CSA… we have the branding, credibility, processes and methodology to support these clients," he says.
CSA has been investing in its data and call centre, which at present services a handful of its major local clients. The centre, on which RM9 million has been spent to date, could one day be the global hub for some of CSC's clients.
CSA is in the process of tying up several significant projects, says Yong. Among these is a tie-up with a global client of CSC's, which is looking to relocate its call services centre to Malaysia. This deal, which is "very close to being signed", will rake in about US$2 million per year over the next five years, according to Yong.
Also, CSA is in talks with a multinational bank, another CSC client. The discussions, if successful, will help bring in some US$10 million a year in revenue over seven years.
CSC bought into CSA in 1998 and now holds a 50.25 per cent stake in the company. It is a synergistic move which helped to "complete a missing piece in CSC's global picture", says Yong.
Having CSC as a parent gave CSA an infrastructure to provide a "wide range of IT services to its clients" as CSC Malaysia's strength was only in the insurance sector, while CSA's niche was in the banking and finance sector.
Another business which can start reaping financial benefits fairly soon for CSA is the proposed acquisition of Com-Line Systems Sdn Bhd, a software developer which has not reported any losses since its inception six years ago.
"We had worked with the company before, and although we have a software development team [of 110 people], we needed a high value-added engagement. CSA's presence in the software development market has shrunk. Today, only 20 to 30 per cent of our revenues earned from the SI segment is from software development, compared with 60 to 70 per cent in our early days. This means that CSA has become hardware-centric.
In order to move to the higher value-added segment, we needed to change that around," Yong says. "If we bough people, we'd have to find more business to do, but through buying an existing company, we have people and the existing pipelines that the company is working on."
Com-Line, which develops software for both the private and public sectors, is expected to see some RM60 million in earnings this year, and about RM70 million next year.
Most of the growth in the coming years is expected to be generated from a few government sector projects of significant value.
The deal with Com-Line, which is complex in structure, involves CSA acquiring 51 per cent of Com-Line once the deal is signed and approved. CSA is given an option to buy a further 19 per cent over the next three years, provided Com-Line achieves its profit forecasts.
The complexity of the proposal was to "safeguard the buyer" as the turnkey operator could very easily incur losses if it is not managed properly, he explained.
Still, if all goes well, the deal should be signed and sealed by the end of this month, and if so, "our September numbers should reflect the acquisition of Com-Line", Yong says.
Apart from this, CSA is one of the companies in the consortium, which is producing the government multi-purpose card (GMPC), also known to the layman as the MyKad.
It owns a 20 per cent stake in GMPC Corp Sdn Bhd, and according to industry sources, the company is in talks with several banks to use the GMPC as an ATM card. If this is successful, CSA could see some returns in the form of the sale of hardware and applications.
This, says an analyst, will probably not be very significant: "Hardware isn't a big margins earner. And realistically, how much can you charge for applications?"
"What we'd like to see is the company earning more from its bread-and-butter projects and bringing its costs down more," says a technology analyst.
According to Yong, CSA has been repositioning its staff and not taking non-core work, which was one reason why its earnings had dropped in 2002.
"We've capped our resources, and not replaced the people who've left the company. Also, we're repositioning our staff to do higher resource business," he explains. "If you take in business indiscriminately, you're spreading your resource pool."
While CSA will continue to be a major player in the SI business as it is the key service that the company is offering, Yong believes that over the years, the growth of CSA's other sectors will mean that its SI business will grow smaller proportionally over the years. Ultimately, he estimates, it could form less than half of total profits and revenue.
Analysts are expecting the company to see a 30 per cent growth in net profits to around RM20.8 million, but many are saying that CSA is expensive, trading at a price earnings ratio (PER) of 16 times which is higher than the market PER of about 13 times.
But analysts are cautious. "The company failed to deliver in financial year 2002, while its competitors like Mesiniaga did, so whatever they say now, people want to see results first before reacting," says the technology analyst.