Prestariang’s  1HFY14  core  earnings  of  MYR13.4m  were  below expectations,  making  up  only  33.9%/31.3%  of  our/consensus  full-year estimates due to slowing  contract flows.  In view of potential earnings headwinds  ahead,  we  cut  our  FY14-15F  estimates  by  15%-17%  and lower  our FV to MYR2.00  (from MYR2.34). Maintain NEUTRAL  following yesterday’s share price retracement. 

Below expectations.  Prestariang’s  1HFY14  revenue  slid 7.1% y-o-y to MYR49.6m,  dragged  down  by  weaker  contribution  from  its  software, services and academy division (-8.7%  y-o-y). Correspondingly,  EBITDA sank 27.4% y-o-y to MYR14.2m as margin dipped 800bps to 28.7%. All in,  1HFY14  core  earnings  slipped  29.3%  y-o-y  to  MYR13.4m,  falling short  of  both  our  and  street  estimates.  2QFY14  numbers  improved slightly q-o-q  but were down y-o-y across the board on weaker showing from its core  information and communications technology (ICT)  division. The only bright spot during the quarter was the declaration of its second interim DPS of 1.4 sen, which translates into  a  payout ratio of close to 100% for the quarter.

Outlook.  We  believe  slower-than-expected  contract  flows  largely contributed  to  Prestariang’s  1HFY14  earnings  disappointment.  The negative impact,  in our view,  will likely spill over to 2HFY14 as we notethat there were no sizeable contracts announced by management over the past 2-3 months.  Taking this  into account, we revisit our model and cut our FY14-15F earnings estimates by 15%-17%.

Potential  re-rating  catalysts.  We  note  that  its  University  Malaysia  of Computer  Science  and  Engineering  (UniMy)  recorded  1HFY14  core losses  of  MYR3.4m.  Management  is  in  the  midst  of  bringing  in  a  new education-centric  partner  to  boost  enrollment  numbers.  We  expect  this partnership  to  be  finalised  by  end-Sept  and  potentially  help  push  the tertiary  institution  back  in  the  black  in  FY15F.  On  a  side  note, management  remained  tight-lipped  on  the  utilisation  of  its  recentlyconcluded  placement  exercise,  which  has  raised  some  MYR70m.  We believe this will likely be used to bring in a new recurring earnings stream to the company and will be unveiled by 1QFY15F.

Maintain  NEUTRAL.  With  Prestariang’s  disappointing  1HFY14  results reaffirming  our cautious stance, we maintain our NEUTRAL  call for now. Our  FV  is  reduced  to  MYR2.00  (from  MYR2.34),  based  on  an unchanged FY15F P/E of 20.0x following our earnings revision. 

Source: RHB