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