Investment Highlights

• We reiterate BUY on Prestariang with a higher fair value of RM2.20/share (previously RM2.08/share) based on sum-ofparts valuation (see Exhibit 2). We have raised our FY18FFY19F net profit forecasts by 4-13% to account for narrowing losses at UniMy and a higher-than-expected mark-up margin for Sistem Kawalan Imigresen Nasional's (SKIN) revenue recognition.

• Prestariang's FY17 core net profit surged 144% YoY to RM21.7mil, surpassing our estimate by 25%, and fell in line with consensus. For 4QFY17, core net profit soared 80% QoQ and 353% YoY to RM8.1mil. Note that we have stripped out an impairment loss amounting to RM3.5mil for both 4QFY17 and FY17. The impairment was associated with development costs incurred for Enhancing School Based Learning Assessment in Science and Mathematics (ESBLA) project, which was previously capitalised as an asset. Fortunately, we had not factored in earnings contribution from the project.

• The momentous earnings recovery stemmed from the recognition of SKIN revenue. During the year, the group booked in RM78.1mil of SKIN revenue over 2 quarters (36% of group revenue). Note that this represents only a small portion of the full project value — accounting for only expenses incurred for preparatory works of the project (e.g. feasibility studies and consulting fees). Bumper SKIN revenue is expected when development works kick off, pending a final nod from the government. From our checks, this could come very soon, placing the group on track to commence SKIN operations in mid-March.

• Also notably, UniMy’s 4QFY17 revenue grew 21% QoQ and 3x YoY as its student population increased to circa 520 students vs. 200 students in the previous year. This was helped by the key intakes in April 2017 and August 2017, and the introduction of several diploma and postgraduate programmes in late 2016. Consequently, the segment’s LBT margin narrowed significantly from 207% in 4QFY16 to 25% in 4QFY17. We expect the segment to turn into the black in FY18F, mitigating annual losses of RM5-6mil.

• We continue to like Prestariang for its: 1) leading position in the ICT training and software distribution space in Malaysia; 2) the award of SKIN, which is expected to beef up net profit by more than 8x from FY16 to FY18F; and 3) recent tie-up with Alibaba Cloud and Conversant Solutions to develop EduCloud, which provides potential new revenue streams.

• At the current price, Prestariang appears undervalued for a solutions provider. The company currently trades at a 1-year forward PE of 11x, while its regional comparables, Chinasoft International and Hexaware Technologies, are both trading at 19x.

Source: AmInvest Research - 28 Feb 2018