Investment Highlights

• We place our call and fair value under review pending further clarification from a meeting with management. We provide Prestariang’s fair value under various scenarios in Exhibit 1.

• Prestariang's 1QFY18 core net profit jumped 83% YoY to RM6.0mil due to the recognition of revenue from the Sistem Kawalan Imigresen Nasional (SKIN). Our current earnings projection assumes uninterrupted contributions from the project. Based on this, the 1Q earnings are within our expectations and consensus, accounting for 8-9% of full year forecast. This quarter, the group only booked a small portion of SKIN revenue from the preparation of requirement design specification (RDS), mainly incurring staff expenses. Bumper SKIN revenue can be recognized in the 2H if hardware deployment phase begins as scheduled.

• Sequentially, the 1QFY18 core net profit was down 26% owing to seasonality at UniMy. Typically, 1Q is a soft earnings season for UniMy as students’ graduation is in December. In addition, marketing expenses are usually higher in 1Q due to promotional efforts for April’s intake.

• Apart from UniMy, the group booked lower SKIN revenue compared with the last quarter as the bulk of pre-operating expenses were recognised in 2HFY19.

• Meanwhile, the group’s 1QFY18 software and training revenue continued to register steady YoY growth of 7% although PBT margin narrowed 3ppts compared to that of 1QFY17’s due to lower contribution from ICT training.

• Recently, the company’s share price has taken a beating against the backdrop of post-election uncertainty. For SKIN in particular, we have previously noted that any termination would result in a huge compensation for Prestariang, thereby mitigating the concern. In any case, we view that a termination is unlikely as the project is a necessity for the country. In addition, reappointing contractor for the project is a hassle seeing that it took Prestariang 4 years of onerous process, conducting feasibility studies, preparing proposals and obtaining approvals from various government units. Nevertheless, given a change in government, most public-private partnership (PPP) projects in general may come under review.

• Prestariang is currently trading below its ex-SKIN fair value of RM1.20, based on 18x FY18F PE for its non-concession businesses. Its regional comparables, Chinasoft International and Hexaware Technologies, are trading at 20x and 22x respectively.

Source: AmInvest Research - 16 May 2018