The heat on SKIN puts Prestariang in a spot

Institutional shareholder overhang on the stock could persist

THE uncertainties hanging over its multi-billion ringgit border control project have taken a toll on Prestariang Bhd shares, leaving the stock in an overhang position due to its heavy institutional shareholding.

The stock has gone on a freefall, slashing over 50% of its value in less than a month’s time, following concerns that the Sistem Kawalan Imigresen Nasional (SKIN) project - which Prestariang secured in July 2017 - might be re-tendered.

The sharp decline in share price has left investors in a quandary, particularly for those who built their stake in Prestariang at higher prices, as reducing their stake at the current level might mean selling at a loss.

Sources say Prestariang’s SKIN contract is not likely to be revoked. However, they hinted that the project might not be in its current format, therefore raising questions on whether the RM3.5bil contract value may be significantly reduced.

As at press time, Prestariang did not respond to StarBizWeek’s queries on the status of SKIN and the shares disposal by its major shareholders.

Bogged down by fears on SKIN, some major institutional shareholders have been paring down their stake in the technology firm over the last few few months, led primarily by Retirement Fund Inc (KWAP).

The pension fund, which had a 13.02% stake in Prestariang in May prior to the 14th general election, has steadily reduced it to 7.82%.

Meanwhile, the AIA group of companies has rapidly disposed its Prestariang shares in the past few days, as it reduced its indirect stake from 9.76% as at end-October last year to 8.71% on Oct 24. A day later, the equity interest was further cut to 5.52%.

The ongoing heavy selling on the stock has put other shareholders on tenterhooks. However, some market observers believe the stock has been oversold at this level.

A source close to another major institutional shareholder of Prestariang tells StarBizWeek that the fund is currently reviewing its interest in the company.

“We are looking at few options, one of which is to reduce our exposure in Prestariang,” he says.

As speculation persists on the SKIN contract, the falling share price led to the forced selling by Prestariang’s single largest shareholder and founder, Abu Hasan Ismail ( pic), on Oct 25.

While his shares amounting to 3.13% of the company was forced sold to rectify a personal margin position, he still has another 24% in Prestariang. Currently, Abu Hasan is the presi- dent and group managing director of Prestariang.

A fund manager says that the selling pressure on Prestariang will come to a halt, only when the institutional funds, especially KWAP, stop paring down their stake.

While the exact reason behind KWAP’s sale of shares is unknown, it is worth noting that the pension fund increased its pace to reduce its equity interest, after its representative stepped down from Prestariang’s board of directors.

On Oct 1, KWAP’s former chief investment officer Nik Amlizan Mohamed resigned from Prestariang’s board, after she resigned from the pension fund. On that day, KWAP had a direct stake of 10.52% and indirect stake of 0.91%.

To date, KWAP has yet to appoint a replacement for Nik Amlizan in the board of directors of Prestariang.

The SKIN project remains a crucial contract for Prestariang, even though the technology firm has other business interests such as the supply of software, training and certification programmes, integrated education platform EduCloud as well as its tertiary education institution, the University Malaysia of Computer Science and Engineering.

In the financial year of 2017, SKIN contributed nearly 36% or RM78mil of Prestariang’s total revenue. In fact, the substantial top line growth seen by the company in the year was contributed heavily by SKIN.

Hence, losing the contract or even undertaking it at a lower value will have its implications on Prestariang’s financial performance, going forward.

In its existing form, SKIN is a 15 year concession project which officially started on April 25 this year.

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), 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.

Last month, Prestariang announced that it has secured loan funding totalling RM978.4mil from state-owned Bank Pembangunan Malaysia Bhd for the implementation of SKIN

Prestariang holds a 70% stake in Prestariang Skin Sdn Bhd (Pskin), the implementer of SKIN. The remaining 30% equity interest is owned by the three founders of the immigration and national border control system, including Pskin chief executive officer Raja Azmi Adam.

Three months ago, the Home Ministry secretary-general Datuk Seri Alwi Ibrahim said that SKIN is one of the projects to be reviewed by the government to improve its governance and rationalise expenditure.

The statement immediately raised concerns over the possible re-tender exercise and even the cancellation of the SKIN project.

A source says that Prestariang was initially willing to walk away from SKIN and accept the compensation from the government, in the event of the project being re-tendered.

“This was because the company has already paid very high costs under the previous administration to secure the multi-billion ringgit deal. So, with a new administration in place, the company feels it is not worth the try to undergo the tendering process all over again,” he says.

The source, however, stopped short of saying what the “very high costs” mean.

“Nevertheless, since the government is willing to re-negotiate the terms of of the contract, currently both parties are undergoing negotiation on SKIN. It is likely that Prestariang gets to keep the contract,” he says.

Year-to-date, the Prestariang stock has dropped by some 68% to 48 sen, as of Oct 26. At this price, it has a a market capitalisation of RM231.5mil, a far cry from the billion ringgit market cap it used to command.

For context, the counter has underperformed the FBM Small Cap Index, which has declined by about 26% in the same period.

Despite Prestariang turning into a penny stock since early October, analysts still assign target prices above the RM1-mark for the stock.

According to Bloomberg, the consensus 12-month target price is RM1.53.

CIMB Research Nigel Foo estimates SKIN to be worth RM1.08 per share.

“We estimate SKIN’s [current] value to be around RM750mil and since Prestariang owns a 70% equity stake in SKIN, this concession is worth RM525mil or RM1.08 per Prestariang share.

“At the current share price of 44 sen, investors are valuing its existing business on 2018’s price-to-earnings ratio of 13 times and assuming zero value for SKIN project,” says Foo in an earlier note, who retained the “add” call on Prestariang.