Investment Highlights

• We reaffirm our BUY recommendation on Prestariang with unchanged forecasts and fair value of RM2.60/share, pegged to FY18F PE of 21x. Prestariang is currently trading at a CY18F PER of 18.5x, 0.5SD below its 5-year historical average.

• Prestariang’s 1QFY17 core net profit came in at RM3.3mil (+22% YoY; +22% QoQ). We deem Prestariang's 1QFY17 net profit to be within estimates as we expect the group's earnings to pick up in the next few quarters on the back of higher student enrollments. Excluding projected contributions from Sistem Kawalan Imigresen Nasional (SKIN), which are expected to come in 2HFY17, the 1Q profit accounted for 18% of our full-year forecast.

• The weak 1QFY17 profit was mainly attributed to less favourable product mix consisting of lower contribution from ICT training (Academy) services, which offers better GP margin (>40%). In addition, GP margin of software licensing and distribution slipped by 5ppts from 22% in 4QFY17 to 17% in 1QFY17 due to higher costs of software licenses resulting from a stronger USD.

• On a positive note, 1QFY17 revenue picked up sharply by 78% QoQ and 8% YoY due to higher orders for software licenses, particularly Microsoft's products. Going forward, we believe GP margin of software licensing and distribution would recover to 19% if USD/MYR stays at current level of 4.30 vs. 4.42-4.49 in 1QFY17.

• Recently, the group's wholly-owned Prestariang Systems was granted a 30% tax exemption for five years from January 2017 onwards. As a result, the company's effective tax rate declined from 25% in 1QFY16 to 16% in 1QFY17.

• In the education segment, both revenue and PBT were relatively unchanged as UniMy's key intake dates are April and August. In April 2017, Prestariang saw its highest student intake of 200 students, bringing its total student population close to 400 students as of May 2017. This means that the segment is now closer to our estimated breakeven level of 480 students.

• For the upcoming intake in August 2017, management expects another 200-300 students. We believe this is achievable given the effectiveness of UniMy's execution in April 2017. If this materialises, Prestariang is on track to achieve our full-year forecast.

• For SKIN, management has said that a concession arrangement is currently being finalised, after which the project will be allowed to commence. We expect the deal to be finalised by end of 1HFY17

Source: AmInvest Research - 23 May 2017