(Dec 6, RM1.39)
Maintain add with an unchanged target price of RM2.69: Prestariang Bhd’s wholly-owned subsidiary, Prestariang Tech Services Sdn Bhd (PTECH), has entered into a memorandum of agreement with In Continu Et Services (INCS), a subsidiary of Imprimerie Nationale SA (Insa), appointing INCS as its strategic technology partner to work on the Sistem Kawalan Imigresen Nasional (SKIN) project.
Insa acquired the identity management business from Thales Group in May 2017.
Insa’s contract is worth €21.1 million (RM101.1 million) for the offshore portion of the works and RM4.4 million for the onshore portion, all to be completed in 32 months.
In addition, Prestariang SKIN Sdn Bhd (PSKIN) signed a teaming agreement with Dell Global Business Center Sdn Bhd for the implementation of SKIN, whereby Dell will participate in the SKIN project, performing relevant parts of the work as a sub-contractor for PSKIN.
This news is a positive surprise. Our earlier estimate was for SKIN’s capital expenditure (capex) to be at RM800 million and the domestic team to handle 30% of SKIN’s capex. The domestic team is now targeted to handle 87% of the capex and development works, and this should translate to a lower capex for SKIN.
We estimate SKIN’s capex could be reduced by around RM50 million if most of the development costs are incurred locally.
Nevertheless, until we receive direct confirmation from management, we keep SKIN’s capex assumption at RM800 million. We also expect Prestariang to finalise its debt funding exercise for SKIN soon and estimate the construction of the SKIN project to generate a 25% profit before tax (PBT) margin over the next three years.
Accounting standard FRS IC12 allows Prestariang to recognise the construction profits of SKIN when the asset’s infrastructure is being built.
In the third quarter of financial year 2017 (FY17), Prestariang recognised a maiden RM30 million revenue and RM8.3 million earnings before interest and taxes for the SKIN construction works.
We estimate that the company could recognise a total RM200 million PBT from SKIN over the next three years and construction profit should peak in FY19 forecast as most of the installation works for SKIN’s infrastructure should already be completed.
As at end-September 2017, Prestariang’s net cash in its balance sheet was RM68 million, or 14 sen net cash per share. Given its current weak share price, we believe Prestariang would not be pursuing a private placement exercise to raise new money to fund its equity portion of SKIN. Instead, we believe Prestariang could be getting investors to subscribe for SKIN’s equity funding directly. — CIMB Research, Dec 6