Investment Highlights

• We are upgrading Prestariang from a HOLD to BUY with unchanged forecasts and SOP-derived fair value of RM2.08/share (see Exhibit 2). Our upgrade is triggered by the recent sell-down in the company's shares beyond our fair value. At the current price, we are increasingly seeing value in the company. Prestariang currently trades at a FY18F PE of 12x, which represents a steep discount to its peer average of 18x.

• Prestariang's 2QFY17 core net profit came in within our expectations at RM5.8mil, surging 76% QoQ and 72% YoY. This brings 1HFY17 net profit to RM9.0mil (+50% YoY), accounting for 45% of our full-year forecast. However, the 1H profit missed consensus at 32% of FY17F estimates.

• The QoQ growth in 2QFY17 net profit was mainly attributed to: 1) a 29% QoQ jump in software licensing revenue, which was underpinned by higher uptake in Microsoft licences (under MLA 2.0); as well as 2) PBT margin expansion (from 15% in 1QFY17 to 18% in 2QFY17) in the ICT Services (licensing + training) division due to the strengthening of the ringgit.

• Meanwhile, the ICT Training division remains on track, posting RM4.5mil in revenue for 1HFY17 (+11% YoY). The growth was fuelled by a higher number of trainings provided to civil servants (RBTCS programme) and to the oil and gas industry (Oil & Gas TVET). For the full year, we are projecting RM10mil in ICT training revenue. The revenue is expected to pick up in 4QFY17as more trainings are usually conducted during the year-end.

• On UniMy’s progress, its revenue more than doubled QoQ as the division attracted some 200 new students during the April 2017 key intake. This brought its total student population to ~400 as of May 2017. Consequently, the segment’s loss before tax margin narrowed markedly from 194% to 63%.Currently, we gather that UniMy’s student population has increased to ~520, helped by the August 2017 intake. We expect the segment to achieve breakeven in FY18F, mitigating annual losses of RM5-6mil.

• The group has recently tied up with Alibaba Cloud and Conversant Solutions to build an integrated education platform called EduCloud. The platform will comprise features such as learning management system, payment services and e-commerce marketplace. Management said that the group is in active customer engagement to identify specific initiatives in Malaysian higher education. The pilot version is scheduled to be launched by end-2017.

• There are currently 5.5mil students in our local primary and secondary schools, and 1.3mil students at domestic universities. Assuming Prestariang could capture 5% of the market share and earn RM30/student/year, applying a 20x PE would value the venture at RM204mil, or ~RM0.40/share on a FD basis. We note that this is merely a back-of-envelope calculation and has not been factored into our valuation. In addition, at Prestariang’s current price, we believe the prospects from EduCloud has not been priced in.

Source: AmInvest Research - 25 Aug 2017