AI Adoption And Global Delivery Are Expected To Drive Long Term Upside Narrative

Catalysts

About Systems

Systems provides technology and business process solutions that combine AI, cloud and digital engineering with globally distributed delivery centers.

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

• Rising enterprise adoption of AI driven transformation across banking, telco and retail is expanding demand for Systems high value consulting and implementation projects, supporting sustained double digit revenue growth and higher blended billing rates.
• Global cost optimization, combined with clients push for AI augmented delivery, reinforces Systems Pakistan and Egypt delivery model, which is 30% to 50% cheaper than Indian peers, protecting win rates and underpinning operating margin resilience.
• The shift from pure staff augmentation to outcome based and value creation engagements in global shared services, including the British American Tobacco platform, positions Systems to capture larger, stickier contracts, improving revenue visibility and earnings quality.
• Technology vendors embedding advanced AI into core platforms such as Microsoft, SAP and Temenos are relying more on capable partners. Systems recognition as a top tier partner is likely to channel more high margin implementation and cloud work into its pipeline.
• Improving perception of Pakistan as an IT export hub and active government support for talent development, including large scale internship programs, should ease supply constraints and enable Systems to sustain headcount growth while stabilizing salary inflation and supporting net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Systems's revenue will grow by 20.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 18.0% in 3 years time.
• Analysts expect earnings to reach PKR 24.3 billion (and earnings per share of PKR 14.22) by about December 2028, up from PKR 10.0 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 26.6x on those 2028 earnings, up from 24.5x today. This future PE is greater than the current PE for the PK IT industry at 22.9x.
• 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 34.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid adoption of AI assisted development and automation tools could compress pricing across bespoke development and BPO work faster than Systems can offset through higher volumes and value add services, which would pressure revenue growth and operating margins.
• Systems heavy exposure to a few fast growing verticals and regions, including BFSI, telco and the Middle East, leaves it vulnerable to any sector specific or geopolitical slowdown, which could reduce the current double digit revenue CAGR and ultimately weigh on earnings.
• The strategy to pursue aggressive M&A for talent and new capabilities in AI and global shared services introduces execution and integration risk, where overpaying for acquisitions or failing to capture planned synergies could dilute net margins and depress earnings.
• Persistent reliance on Pakistan based labor arbitrage of 30 to 50 percent versus Indian peers may erode if wage inflation, tax regime changes or rising competition from other low cost hubs narrow the cost advantage, which would weaken the company’s ability to defend margins and sustain profit growth.
• Growing dependence on large global partners such as Microsoft, SAP and major CPG and BFSI clients concentrates bargaining power with these counterparties, and any loss of key certifications, partner status or large contracts could materially hit revenue and net profit.

Valuation

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

• The analysts have a consensus price target of PKR180.0 for Systems based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be PKR134.6 billion, earnings will come to PKR24.3 billion, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 34.3%.
  
• Given the current share price of PKR166.04, the analyst price target of PKR180.0 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.