Will HeiTech Padu return to the black this year?

• Business environment to remain challenging in 2014
• To explore new opportunities in Middle East and Asean

ALTHOUGH HeiTech Padu Bhd, an IT system integrator listed on the Malaysian stock exchange, reported an improvement in its bottomline, questions remain on whether it would be able to return to the black this financial year.

The company released its first half financial results recently, reporting a second consecutive first-half net loss.

When HeiTech Padu announced its 2013 full-year results in February, it said that the group’s business environment will “remain challenging.” However, with strategies in place to overcome these challenges, it said that “the group is expected to be profitable in 2014.”

When it released its first-half 2014 financial results in late August, it continued to report a “challenging business environment,” but made no mention about expecting to be profitable in 2014.
 
HeiTech Padu’s net profit has been on a downtrend since 2008, when it reported a net profit of RM29.66 million. In 2013, it recorded its first full-year net loss, of RM32.78 million. The company attributed the net loss to the increase in project development costs as a result of project delays.
 
[RM1 = US$0.31]
 
The company registered a first-half net loss of RM6.44 million, a slight improvement compared with the RM6.77-million net loss a year ago. For the first half ended June 30, 2014, its revenue went up 11% to RM184.23 million, versus RM165.33 million in the first half of last year.
 
The improvement in revenue was mainly driven by its IT-related products and services, which jumped from RM148.42 million in the first half of last year to RM165.75 million in the first half of this year.
 
In term of its verticals, managed services continued to be the largest revenue contributor at RM86.7 million, followed by homeland security at RM22.4 million.

HeiTech Padu’s bulk mailing outsourcing services also improved to RM18.48 million, versus RM16.92 million in the first half of 2013. The increase in bulk mailing revenue was driven by growth in Malaysia at RM15.5 million, compared with RM13.2 million last year. Bulk mailing revenue in Indonesia declined 18% to RM3 million during the period.
  
Despite the slight improvement in the bottomline, as well as significant improvements in revenue, the company remained cautious in its outlook.
 
“Going forward, the global economy is expected to be on a path of moderate recovery. The sustained improvements in the advanced economies will be a positive impulse for international trade,” said Heitech Padu in its filing to Bursa Malaysia recently.
 
“However, ongoing uncertainties surrounding monetary and fiscal policy adjustments in the advanced economies remain a risk to growth. For the Malaysian economy, domestic demand will remain supportive of growth.
 
“While domestic demand is expected to moderate following the ongoing fiscal consolidation, the external sector is expected to benefit from improving global conditions. The growth momentum is therefore expected to remain on a steady trajectory.
 
“The group’s business environment is expected to remain challenging for the rest of the year,” it said.
 
Although the group appears to have toned down its optimism, investors are still somewhat optimistic on the stock.
 
So far this year, HeiTech Padu shares have gained about 8%, from 66 sen early this year to 71.5 sen on Sept 10, 2014. About a month ago, its shares were as high as 78 sen, which represented a year-to-date increase of 18%.
 
Plans to overcome the challenges 
 
The company said that it would continue to implement “relevant strategies” in order to overcome its business challenges.
 
For its IT-related products and services segment, HeiTech Padu said that it will focus on securing more recurring business from existing customers, while gaining new business from both existing and new customers.
 
“The group will also continuously explore new opportunities in the Middle East and Asean,” HeiTech Padu said in its filing.
 
The plan to seek more business outside Malaysia is a logical move, as it allows the company to capture a slice of a much larger pie.

According to market research company MarketsandMarkets, the global system integration market is expected to grow from US$191.36 billion in 2013 to US$331.76 billion in 2018. This represents a compound annual growth rate (CAGR) of 11.6% from 2013 to 2018.
 
“System integration brings a cost-effective and solitary solution for IT infrastructure and application software available globally. It is expected that future outlook for growth in the system integration market will continue to remain bright as businesses continue to search for open and distributed systems/ architectures,” said MarketsandMarkets.

In a separate report by MarketsandMarkets, it said that the system integration market in the Middle East and Africa is expected to grow to US$10.34 billion in 2016, from US$6.3 billion in 2010, representing a CAGR of 8.87% from 2011 to 2016.
 
As for its bulk mailing outsourcing services, HeiTech Padu said that it would grow the business by continuing to promote value added services to its existing customer base from both the public and private sectors.
 
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