Keeping a Skin-tight focus
Fresh from clinching a RM3.5bil job, Prestariang intends to focus on things that it can control
AFTER nearly four years of waiting, the concession agreement (CA) for the Sistem Kawalan Imigresen Nasional (Skin) project has been finalised between Prestariang Bhd and the Government. While expectations were high prior to the official announcement, it seems that the market is rather negative on the project’s details, post-signing of the CA.
Prestariang’s share price had gone on a roller-coaster ride this week, going up by 15 sen, or 6.72%, to RM2.38 on Monday, just a day before the signing of Skin. The counter was temporarily suspended on Tuesday as the company inked the deal with the Government.
Following the resumption of trading on Wednesday, Prestariang was down 20 sen or 8.37% to RM2.19, shedding more than what was gained earlier in the week.
By Friday, the share price continued its downward trend, further slipping to RM2.03.
However, Prestariang president and group chief executive officer Dr Abu Hasan Ismail is unperturbed, as he remains focused in strengthening the information and communications technology firm’s fundamentals.
“From day one, we have been focusing on the things that we can control. I will continue to focus on things that I can control, such as the numbers and others that are within our means,” Abu Hasan tells StarBizWeek.
Prestariang has clinched the 15-year-long Skin concession worth RM3.5bil via Prestariang Skin Sdn Bhd (Pskin), a unit of Prestariang Services Sdn Bhd, which in turn is a subsidiary of Prestariang.
Skin will provide a comprehensive and integrated solution composed of five main modules, namely, passport, visa, border control, enforcement and risk assessment.
In the first three years (2018 to 2020), the Main Market-listed Prestariang will develop and deploy the system, and payments by the government to the company will only commence in 2021.
Skin, which will replace the current immigration system called MyIMMs, is projected to provide the information and communications technology firm an annual payment of about RM294.7mil from year four to year 15 during the maintenance and technical operation phase.
While the market seems to be less receptive to the Skin announcement, analysts, on the other hand, have been largely mixed on the details of the 15-year-long concession. This is largely due to the Prestariang’s lower-than-expected stake in Skin.
Prestariang will possess an effective stake of 70% in Skin, while the remaining 30% will be owned by the three founders of the immigration and national border control system, including Pskin chief executive officer Raja Azmi Adam.
Despite the multi-million revenue contribution from the project guaranteed by the government, CIMB Research has indicated its “neutral” stance on the impact of the project on Prestariang.
“We are neutral about the development as Prestariang’s announcement has come with both positive and negative elements.
“The positives are potentially higher construction and concession earnings for Skin.
“In addition, the project’s internal rate of return could be higher if Skin obtains Multimedia Super Corridor (MSC) status.
However, the main negative is the revelation that Prestariang will only have an effective 70% stake in Skin,” says the research house, which has maintained its “add” call on the company.
Note that in its bid to acquire MSC status for Skin, Prestariang has acquired two office blocks in Cyberjaya, which is also aimed to meet its growing operational demand and capacity going forward.
AmInvestment Bank Research which downgraded its recommendation on Prestariang to “hold”, echoes a similar take on the project announcement.
“All-in, the reduction in project ownership (in our assumption) from 100% to 70% coupled with the potential dilution from new share issuance have contributed largely to our reduction in fair value to RM2 from RM2.60 previously,” it says.
However, other research houses such as RHB Research and PublicInvest Research, are more sanguine on the recently-secured Skin, as the project is envisaged to bring more recurring income to the company.
“The Skin announcement will the next milestone to watch out for.
“This, in our view, marks its successful transition to a relatively more stable recurring earnings stream from a contractually-based income model,” says RHB Research.
PublicInvest Research which reiterated its “outperform” call on Prestariang, opines that the Skin project could generate at least RM59mil to RM112mil additional cash flows per year, assuming a 20% to 38% profit margin.
The information and communications technology firm is currently in the midst of its long-term transformation programme called “Transformation 5.0” to identify itself as a platform-based services company aligned to two core business streams, namely, technology and talent.
With the signing of Skin’s concession agreement, it marks a significant milestone for the group, as the first phase of its trans- formation programme is now successfully completed.
“Since Prestariang’s establishment 15 years ago, the company has undergone many changes both internally and with regard to the industry as a whole.
“Prestariang has grown and we are no longer a company that is struggling to find its direction. Now, we are ready to grow further up into not just a local company, but also a regional player,” Abu Hasan points out.
Moving forward, Prestariang aims to position itself as a predominantly recurring income-based firm.
In the eyes of Abu Hasan, the transformation programme is also crucial in putting the company on the right track for a larger recurring income proportion in future. “Ideally, we would like to see our recurring income to be 70% of our revenue mix. We are in the midst of moving from project-based income to recurring income,” he says, while adding that currently recurring income contributes 50% to Prestariang’s overall top line.
Apart from Skin, the transformation programme includes the EduCloud, an integrated education platform, which entails campus management, teaching and learning, entertainment, digital payment as well as online services and application.
EduCloud’s pilot project is expected to be launched in the fourth quarter this year.
In addition, Prestariang’s University Malaysia of Computing Science & Engineering (UniMY) which has been financially-bleeding in the past three years, is expected to break even this year as student enrolment is projected to exceed the breakeven threshold of 500 students.
Skin, EduCloud, UniMY and the revamp of Prestariang existing businesses are expected to boost the company’s financial performance and fillip the firm into a more recurring income-based position.
As the clearly jubilant Abu Hasan says, Prestariang is expected to more than double its overall top line in its current financial year of 2017 (FY17), compared to a year earlier. This is largely due to Skin, as Prestariang is expected to start recognise its contribution following the CA signing.
Financial performance
Prestariang has a market capitalisation of RM1bil and has a price-to-earnings ratio of approximately 111.76 times. Abu Hasan is the single largest shareholder of the firm, with an equity interest of 27.4%.
In FY16, Prestariang’s earnings fell by nearly 48% year-on-year (y-o-y) to RM8.89mil, due to flow through of higher revenue contribution from its lower-margin software and services segment.
However, its revenue rose by 14.36% y-o-y to RM132.07mil in the same period.
As at March 31, 2017, Prestariang which sits on a cash pile of RM38.58mil, possesses total borrowings of only RM364,000. This is, however, set to grow as the company undertakes an investment worth up to RM1bil to develop and deploy the Skin system.
“We will look at raising funds from the capital market and the debt market via different methods such as sukuk and direct term-loan to finance the deployment of Skin.
“However, we are discounting the possibility of engaging in a rights issue or private placement for this purpose,” says Abu Hasan.
CIMB Research forecasts Prestariang’s gearing ratio to grow to 0.84 times and 1.61 times in FY17 and FY18 respectively.