AI And Shared Services Risks Will Challenge Execution But Long-Term Potential Will Still Build

Catalysts

About Systems

Systems Limited provides IT services, business process outsourcing and technology solutions with a focus on AI, cloud and digital transformation for global clients.

What are the underlying business or industry changes driving this perspective?

• Although the company sees what it describes as a very large opportunity in applying AI and Gen AI to shared services, client projects still require substantial data engineering, security and integration work. This could slow conversion of this interest into billable revenue and delay the impact on earnings.
• While labor arbitrage in Pakistan and Egypt currently provides a 30% to 50% cost advantage versus India, rising use of AI-assisted development and automation by global competitors may erode that edge over time and pressure net margins.
• Although management highlights strong demand from banking, financial services and telco clients for AI use cases and hyper personalisation, many engagements start as pilots or proofs of concept. This may limit near term scale and keep revenue growth more dependent on existing core services.
• While the British American Tobacco shared services acquisition is described as a game changer that adds high end BPO and finance capabilities, the inability to disclose revenue and cost details under NDAs makes it harder to assess integration risk or the timing of any contribution to EBITDA and net profit.
• Although there is enthusiasm around M&A to acquire senior talent and new offerings across current geographies, buying and integrating entrepreneurial teams in AI, cloud and digital could raise operating costs and weigh on margins if productivity and pricing gains do not materialise quickly.

Assumptions

This narrative explores a more pessimistic perspective on Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Systems's revenue will grow by 29.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.0% today to 17.5% in 3 years time.
• The bearish analysts expect earnings to reach PKR 29.1 billion (and earnings per share of PKR 19.76) by about January 2029, up from PKR 10.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.1x on those 2029 earnings, down from 23.7x today. This future PE is lower than the current PE for the PK IT industry at 23.7x.
• The bearish analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 34.33%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI assisted development and code generation tools could compress project timelines and billing rates faster than Systems can cut delivery costs. This may cap billable hours growth and weigh on revenue and earnings.
• Growing global use of automation and AI in competing offshore hubs such as India could narrow the 30% to 50% labor cost advantage that management cites for Pakistan and Egypt. This may pressure pricing and net margins over time.
• A high concentration of work in banking, financial services and telco, combined with 57% of revenue coming from the Middle East and Africa region, leaves Systems exposed if large clients slow technology budgets or regional demand softens. This would directly affect revenue and EBITDA.
• The British American Tobacco shared services acquisition is described as a game changer but sits under NDAs with no disclosed revenue or cost guidance. Integration challenges, underutilisation of acquired staff or slower client roll out could dilute EBITDA margins and earnings.
• Management is openly prioritising M&A to secure senior AI and cloud talent and expand offerings. If acquired teams do not scale quickly enough, the added leadership and integration expense could exceed incremental gross profit and restrain net profit growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Systems is PKR179.0, which represents up to two standard deviations below the consensus price target of PKR215.5. This valuation is based on what can be assumed as the expectations of Systems's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PKR277.0, and the most bearish reporting a price target of just PKR179.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be PKR166.4 billion, earnings will come to PKR29.1 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 34.3%.
  
• Given the current share price of PKR160.25, the analyst price target of PKR179.0 is 10.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.