3Q15 core earnings of MYR6m came within our expectations. Maintain NEUTRAL with our unchanged MYR2.48 TP (1% upside). While we find positives in management’s focus in securing new contracts to help enlarge its earnings base going forward, we believe it is close to being priced to perfection at this juncture.

Results review. 9M15 revenue jumped 37.1% YoY to MYR91.2m due to a better showing from its software and services division (+33.0% YoY). Core earnings, however, shed 18.2% YoY to MYR15.1m (at 49.3%/31.1% of our/consensus full-year estimates respectively), due to the lower-margin nature of its existing jobs. On a quarterly basis, 3Q15 core earnings of MYR6m came within our previous guidance of MYR6-11m (previous report: Prestariang : All Priced In For Now – 18 Nov).

Dividend remains generous. On a side note, management declared a third interim DPS of 1.0 sen, which translates into a generous payout ratio of 80.4% for the quarter. 9M15 DPS now total 2.75 sen with an implied payout ratio of 88%.

Forecasts and risks. No changes to our earnings forecasts. We continue to expect its earnings momentum to pick up substantially in 4Q15 given that the Role-Based Training for Civil Servants training component of its Microsoft contract has recently commenced. We gather that the group would soon secure the award of the implementation of accelerated training course for the Program for International Student Assessment (PISA). We expect the official rollout to take place by 1H16. Key risks are: i) potential further slowdown in orders for Microsoft licenses from the Government, and ii) prolonged losses at its university (which we forecast to break even by 1H16) due to a lack of economies of scale.

Maintain NEUTRAL. All in, we maintain our NEUTRAL call with our TP unchanged at MYR2.48, based on 20x 2016F P/E. We used DCF (based on WACC of 10.3% and terminal growth rate of 1.0%) as a corroborative methodology and derived a valuation range of MYR2.00-MYR2.69 (depending on scenarios). Our TP falls into this DCF-derived valuation range.

Base case DCF valuation. Under our base case scenario, we assume Prestariang would continue to focus on delivering its existing contracts in the foreseeable future. We note that we are pegging an equity weighting of 95% in deriving our WACC of 9.8% given management’s prudent approach and preference towards zero to minimal gearing for its daily operations.

Best case DCF valuation. Under our blue sky scenario, we assume that Prestariang would secure an additional revenue stream of MYR100m p.a. by FY17F with a target EBIT margin of 30% on top of delivering its existing contracts in the foreseeable future. We leave our capex assumptions unchanged at MYR5m p.a. given management’s asset-light business approach to minimize upfront capital outlay.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Prestariang provides ICT services focused on professional training and certification with industry partners such as Microsoft, IBM, Oracle and Autodesk. It has also ventured into the provision of training for the oil and gas sector.

Recommendation Chart

Source: RHB Research - 26 Nov 2015