• 3Q18 core earnings fell yoy and qoq mainly due to lower SKIN contribution and higher opex for its software license distribution and ICT training segment.

• Overall, 9M18 core earnings trailed ours and consensus estimates at 33% and 22% respectively.

• Revised FY18-20F earnings mainly by re-allocating the SKIN contribution and lower our assumption on its core businesses contribution.

• Downgrade to SELL at lower SOP-derived TP of RM0.45 (from RM0.70). We raised our concern over the SKIN project as we see increasing uncertainty on the continuation of the project.

Earnings disappointment

3Q18 core earnings fell 83% yoy to RM0.8m on lower recognition of the Sistem Kawalan Integrasi Nasional (SKIN). It was further dragged by additional expenses amounting RM7.9m (including the penalty) received from Inland Revenue Board on the difference in interpretation under MSC qualifying activities for its software license distribution and ICT training segment. Overall, its 9M18 core earnings were trailed ours consensus estimates at 33% and 22% respectively.

SKIN - Slower progress

Meanwhile, core earnings fell 21% qoq attributable to slower progress of the SKIN contribution and higher opex from Software & services by recognition of RM2.3m tax penalty. During the quarter under review, its employment service – a collaboration with PTPTN was the only segment that grew positively at PBT level, up by more than 100% to RM96k. However, the contribution to revenue is only at 8%.

SKIN re-allocation

We revised our earnings forecast for F18F/FY19F/FY20F by -55%/- 37%/11% mainly by re-allocating SKIN contribution and lower our assumption on other business ie. software license distribution, ICT training and education segments. We raise our concern on the SKIN project as there is still no statement yet from the government on the status of the project.

Downgrade to SELL at RM0.45 TP (from RM0.70)

We downgrade our call to SELL from HOLD with lower SOP-derived TP of RM0.45. Besides the downside of its core business, we raise our concern over the SKIN project as we see there is uncertainty towards the continuation of the project since there is no official statement by the government on this.

Source: BIMB Securities Research - 29 Nov 2018