· Key contracts renewed to remain profitable. PRESBHD has finally managed to extend several of its multi-year high-margin contracts such as the 3P Programs and IC Citizen project. To recap, FY14 revenue tumbled 33.9% YoY to RM78.9m mainly due to the extension deferment of its IC CITIZEN program and the completion of Projek Komputer 1Malaysia. As a result, Core Net Profit dipped by 51.8% YoY to RM20.3m mainly underpinned by the lack of contract flows. In fact, as of end-March 2015, it recorded stronger revenue of RM40.0m (+94% YoY) driven mainly by higher contribution from the newly awarded Microsoft Licensing Agreement (MLA) 2.0. However, the Group recorded a lower NP of RM4.0m (-37% YoY) due to delay in extension of the high margin 1Citizen and 3P programs. Thus, with the contracts now extended, they will provide sustainable recurring income and profitability to the Group in the future.

· Master Licensing Agreement (MLA) 2.0 to be key earnings driver. On Feb-2015, PRESBHD was appointed the sole Microsoft Licensing Solutions Partner (PRESBHD was one of the nine LSPs that bid for the MLA 2.0 contract) to provide Microsoft software under MLA 2.0 to all government agencies in Malaysia worth c.RM93.2m over a 3-year period. During 1Q15, the Group secured its single largest contract under MLA 2.0, an order book of c.RM30.0m from the Inland Revenue Department Malaysia. On top of that, the Group also secured another contract under EAA worth RM24.3m from the MOE to supply Microsoft software to schools and colleges, for the next 3 years. With the Group’s strong partnership with Microsoft dating back since 2006 as well as its expanded value-added services, we believe that PRESBHD will be able to secure more Microsoft contracts moving forward. We understand that PRESBHD received an average RM20.m worth of contract p.a. in MLA 1.0. Recall that PRESBHD was one of the players among seven, translating into a potential contract market size of over RM100.0m (assuming across the board). As such, our assumption of RM100.0m contract award assumption from MLA 2.0 seems achievable, given that the group has already secured c.RM54.3m during 1Q15 for the next 3 years. In fact, we do not discount a possible positive surprise by the company exceeding our expectation. Note that the MLA 2.0 has a lower net margin contribution of c.15%.

· Turning on a new leaf with MARA partnership. UniMy has been recording losses since its inception due to lower student base of c.100 students. We understand that UniMy requires 400 students to break even. To resolve the issue, PRESBHD could have found an inflection point for its education arm with Majlis Amanah Rakyat (MARA) emerging as a new strategic investor in UniMy in Dec-2014. With the partnership, MARA shall sponsor 500 students per annum to enroll in UniMY. As of 1Q15, there are already 100 students enrolled into UniMy. Management is looking to break even its UniMy operation by end-FY15.

· MiE Corp JV to boost O&G segment. PRESHD has recently embarked into a jointventure with MIE Corp Holdings Sdn Bhd to supply manpower to the O&G industry, particularly for the RAPID project in Johor. The JV will allow PRESBHD to improve the employability of its trainees by supplying manpower to MIE Corp, whom is one of the key beneficiaries of the RAPID project in Johor. Currently, the Group provides training programmes for the O&G downstream industry for the RAPID project and has already trained c.1,000 workers (c.RM8.0k – RM18.0k revenue per worker) since Dec-2012.

· Huge cash pile in its coffers. PRESBHD is currently sitting on a net cash position of RM126.2m as of Mar-15, translating into 0.26 sen/share or 9.5% of the Group’s market capitalisation. Besides, PRESBHD also has a healthy retained earnings base of c.RM61.6m, suggesting capability to finance its future capex internally. We believe the strong balance sheet will enable the Group to weather any unfavourable operational conditions in the future.

· Minimum dividend payout policy of 50%. In line with its minimum dividend payout policy of 50%, PRESBHD has been consistently rewarding its shareholders by declaring 3.5-5.4 sen annual DPS since FY11-FY14, translating into a 1.4-2.1% dividend yield, respectively. In view of its good prospect and healthy cash flow, management intends to maintain its dividend payout policy moving forward. Based on a targeted dividend payout of 50%, we expect the Group to distribute 5.5-7.7 sen DPS in FY15-FY16, translating into a dividend yield of 2.2%-2.7%. Note that PRESBHD practices quarterly dividend pay-out.

· Not Rated with a fair value range of RM2.20-RM2.91, based on FY16E PER of 16.3x-21.5x, which is the average of the 4-year historical mean PER and +0.5 Std Dev PER, respectively. We believe the higher-end valuation is justifiable given the Group’s edge over its peers such as SASBADI and SEG in terms of: (i) larger market capitalization, (ii) superior NP margins (c.65% and c.160% over SASBADI and SEG respectively), and (iii) stronger growth trajectory with a 2-year NP CAGR of c.80% vs 28% and 32% for SASBADI and SEG, respectively. Do note that our earnings forecasts are more conservative than consensus numbers.

Source: Kenanga Research - 16 Jun 2015