• We expect the Sistem Kawalan Integrasi Nasional (SKIN) would remain the stock’s key earnings driver but lack of track record implies inherent execution risk.
• Additionally, other businesses are faced with potential structural change in government supply contract disbursement and/or stiff competition.
• We revisit our FY18-FY20F earnings forecast; contribution from the SKIN project has been re-allocated to reflect timing of billing while we turn less positive on prospects of the other businesses.
• Downgrade to HOLD with a lower SOP-derived TP of RM0.70 (from RM2.45). Sell on strength.

All about SKIN

Our revised forecast implies a 3-year CAGR of 60% which is solely driven by the SKIN project. However, lack of delivery track record on such huge scale project poses inherent risk to earnings. For instance, earnings contribution from SKIN in 2Q18 earnings underwhelmed in what we believe was largely due to slower-than-expected progress completion in the midst of the country’s transition.

Higher possibility of new players

Along the same vein, we are cautious on the prospects of its software license distribution business in view of the new government’s mantra of open tender for best pricing. Currently, it is the sole distributor of Microsoft Licensing Solutions for all government agencies, public training institutes and public higher education institutions

Education segment is yet to breakeven

We expect the education segment to remain in the red over the near to medium term; its shift to a new campus in Cyberjaya in Aug 2018 should also translate to higher opex in FY18. However, its recent joint collaboration with PTPTN (separate from UniMy) to provide platform for PTPTN’s employability programme could mitigate losses for this segment.

Mainly by re-allocating SKIN contribution

We revised our 2018F-2020F earnings forecast mainly by re-allocating SKIN contribution and lower our assumption on other businesses ie. software license distribution, ICT training and education segments.

HOLD at a RM0.70 TP

We downgrade our call to HOLD with lower SOP-derived TP of RM0.70 (from: RM2.45) which values the stock at 14x/3x FY18F/FY19F PE. While the SKIN project could buffer against potential earnings drag from its core businesses, we are cautious over its inherent execution risk. Sell on strength.

Largely from SKIN

We revised our earnings forecast after taking into consideration of the following:

• Re-allocating Sistem Kawalam Imigresen Malaysia (SKIN) contribution assumption. We expect the SKIN project remains intact. However, due to the transition process with the new government, we expect the project deliverables to be pushed back into FY19-21F (Chart 1).
• Moderate outlook for software license distribution. We are cautious over the long term prospect of its software license distribution business as we see high risk of the service being opened up to other players via a tendering exercise. Currently, software license distribution contributes c.50-60% of total revenue in 2016-17.
• Education (UniMy) yet to breakeven. We revisit our earnings assumptions and now expects the business to remain in the red over the near to medium term. Currently, it has c.500 students registered. We also expect to see higher opex in FY18 following the shift of its campus to Cyberjaya from Putrajaya in Aug 2018.

• Employee service and training – a bright segment. Recall that Prestariang and the National Higher Education Fund (PTPTN), under the Job Matching PTPTN program; Prestariang would be providing a ‘Place & Train’ platform for PTPTN borrowers for 5,000 students. Prestariang receives c.RM2,000 for every successfully placement of the trainees.

Overall, we expect earnings to grow at a 3 year CAGR of 60% driven by the SKIN project. We re-visit our earnings forecast (Table 2) for FY18-FY20F mainly by re-allocating SKIN contributions and lower earnings assumptions for other businesses.

We remain cautious on the outlook of its core businesses amidst stiff competition and possible structural changes in the operating environment (ie. software distribution business is re-tendered by the government). However, we believe the latest venture with PTPTN – employee service and training – have strong growth potential given that unemployment rate among graduates is on the rise.

Downgrade to HOLD, at RM0.70 TP

We downgrade our call to HOLD (from BUY) with a lower target price (TP) of RM0.70 (previously, RM2.45). Our TP is derived based on SOP that implies a FY18F PE of 14x before easing to 3x in FY19F. While the SKIN project could insulate earnings against losses at its core businesses, we note that execution risk is inherent. Sell on strength.

Source: BIMB Securities Research - 14 Nov 2018