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Earnings diversification for Prestariang
01 Apr 2017
Daniel Khoo

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Abu Hasan: ‘Skin will be a pathway for Prestariang to venture into a service-based platform business by developing competencies in three focus areas, namely big data analytics, cybersecurity and coding.’

Skin job provides long-term revenue stream for company

Prestariang Bhd’s upcoming diversification of earnings is in focus following its recent deal with Thales Communications & Security SAS and Thales Malaysia Sdn Bhd for a RM3.5bil government project.

The company’s president and chief executive officer Abu Hasan Ismail tells StarBizWeek the project, called Sistem Kawalan Imigresen Nasional (Skin), offers the company a new viable sustainable revenue stream over the long term.

Prestariang is today mostly an education and information technology company that distributes and manages software licence agreements.

He says the new partnership with Thales will allow the company opportunities to develop and build up new core competencies that will lead to other new business opportunities in the future.

“This revenue stream can offer steady income and stable cash flows.

“Skin will be a pathway for Prestariang to venture into a service-based platform business by developing competencies in three focus areas, namely big data analytics, cybersecurity and coding,” Abu Hasan says.

Abu Hasan says the company is also exploring new areas of collaboration with Thales beyond the current scope of work.

“More importantly, we are exploring our collaboration outside Malaysia into other regions,” he says.

He says the company is not able to give financial impact forecast from the Skin project because it has not yet firmed up the final contract with Thales.

The agreement that was signed last week was a heads of agreement, detailing both companies’ intentions to work together and is usually a prelude to a potential contract that would be signed in the near future.

In an earlier statement, the company says Skin will be implemented through a public private partnership with a build, operate, maintain and transfer method for 15 years.

A period of three years will be allocated for the build and deployment phase and the remainder 12 years for the maintenance and technical operation phase.

On the capital expenditure (capex) expected from this project, Abu Hasan says payments accrued to the company will only begin upon full commissioning of the system, which is after the deployment phase of the project.

“It is an annual payment of about RM294.7mil from year 4 to year 15 during the maintenance and technical operation phase,” he says.

It also means that the company would need to bear all capex during the build and deployment phase but Abu Hasan says the payments that would be received eventually is inclusive of all costs incurred during the build and deployment phase, maintenance and technical operation phase.

Analysts say the company has room to gear up for this project and it would be able to internally fund part of the project’s capex given its light balance sheet structure.

As at Dec 31, 2016, Prestariang has zero borrowings with RM382,000 in outstanding hire purchase payables.

It is in a net cash position of RM58.61mil or 12.1 sen per share.

CIMB Research has assumed a 10% pre-tax margin on the estimated RM900mil capex to develop Skin over a three year period.

“We forecast Prestariang should recognise around RM30mil pre-tax profit annually from Skin’s construction over the next three years.

“In our view, Skin’s construction is likely to be completed in less than three years,” it says.

“If so, Prestariang could start generating revenue earlier than expected from Skin.”

CIMB Research has maintained its add rating on Prestariang with a target price of RM3.00. The stock closed at RM2.31 yesterday.

AmInvestment Bank Research (AB Research) initiated coverage on the stock last week with a buy call and a target price of RM2.60 pegged to a financial year 2018 ended Dec 31 forecasted price to earnings ratio of 21 times.

“This represents a 20% premium to peer average of 17 times, justified by its higher 2016-2019 forecasted net profit compounded annual growth rate (CAGR) of 100% vs the industry’s of 73%. Including an expected dividend yield of 2%, the fair value provides an implied upside of 20% from the current price,” AB Research says.

Notably, AB Research says that Prestariang’s earnings are expected to register a 2016-2019 CAGR of 100%, premised on the Skin contract, pick-up in ICT training orders from Refinery And Petrochemicals Integrated Development project in Pengerang and an uptick in student registration at University Malaysia of Computing Science & Engineering.

AB Research says that its channel checks show that Prestariang could account for the revenue from Skin in its profit and loss statements based on the accounting standards of IC Interpretation 12 (IC 12) vis-à-vis Service Concession Arrangements.

“Under IC 12, revenue can be derived by applying a mark-up margin to estimated costs for the year under review. We estimate that majority of the costs will be incurred in the first three years, i.e. during the build and deployment phase,” it says.

Basing its estimates on typical concessions internal rate of returns of 8%, total costs to build and deploy are estimated to be RM1.9bil while the maintenance phase is expected to cost RM1.2bil in total for 12 years.

Notably, AB Research’s capex projections are significantly higher than CIMB Research’s expectations.

“From this, we project annual costs of RM617mil in the first three years and RM103mil subsequently in the maintenance phase,” AB Research says.

 



Source : http://www.thestar.com.my/business/business-news/2017/04/01/earnings-diversification-for-prestariang

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