Prestariang. Initiating Coverage. Rise and Shine Like A Star. BUY Fair Value Price. MALAYSIA EQUITY Investment Research Daily RM0.92 RM0.

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1 PP10551/09/2012 (030567) 29 Sep 2011 Kong Heng Siong +60 (3) Initiating Coverage Prestariang Rise and Shine Like A Star MALAYSIA EQUITY Investment Research Daily BUY Fair Value Price EDUCATION RM0.92 RM0.50 Prestariang is involved in the provision of Information and Communication Technology services focused on professional training and certification, with industry partners such as Microsoft, IBM, Oracle and Autodesk. Stock Statistics Bloomberg Ticker PRES MK Share Capital (m) Market Cap week H L Price mth Avg Vol (000) YTD Returns Beta (x) - Major Shareholders (%) Dr Abu Hasan Bin Ismail 41.2 Kumpulan Modal Perdana 9.5 PNB 4.8 Share Performance (%) Month Absolute Relative 1m m - - 6m m month Share Price Performance Jul-11 Aug-11 Sep-11 We are initiating coverage on Prestariang with a BUY rating at FV of RM0.92, pegged at an undemanding 6x FY12 PER. Prestariang is involved in the provision of Information and Communication Technology (ICT) services focusing on professional training and certification, as well as the distribution and management of software licenses. We like the company s sturdy orderbook of close to RM280m, established relationship with its key partner Microsoft, innovative in-house developed products and its appealing valuation backed by dividend yield of >10% in the next 2 years. Technology complements its education nature. We see strength in Prestariang s two core businesses given their synergy and complementary characteristics, whereby ICT training and certification is typically provided together with the licensing of the software used in its training and certification. While it can be argued that Prestariang is a technology player, we see greater potential in its professional training and certification business, which pits it closer to education players such as SEGi, Masterskill and HELP. Sturdy orderbook of RM280m. Prestariang has to date secured an order book of close to RM280m, with projects spanning 1 to 4 years up to Its anchor projects include the RM80m industry-based certification program, which received the nod earlier for renewal for another 4 years, and its RM60m MUSE program through which it provides and maintains software licenses for all public higher education institutions in Malaysia. Close rapport with industry partners. Its close rapport with valued partners such as Microsoft, Oracle, IBM and Autodesk, helped to sustain profitability margins. Of note, Prestariang has established close ties with Microsoft, which has been its single most important partner for the last 8 years for provision of software and training certification. Going forward, we see more upside potential for the group s profit margins going into FY12, with a target of 36% at the net level at the close of the year on greater economies of scale. In-house developed products. Prestariang also focuses on R&D activities to develop new programs in-house by working with partners in related fields. We like its R&D-centric focus as creating its own intellectual properties could help to drive up margins as well as provide a launching pad for its regional expansion going forward. Dividend yield of >10%. Given its robust balance sheet with minimal capex requirements apart from R&D expenditure, management has set a dividend policy of up to 50% for the next 3 years. At our forecast earnings, this translates into a lucrative dividend yield of >10% for both FY11 and FY12 given the recent weakness in share price, which has retraced by >44% since going public in late-july this year. FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Revenue Net Profit % chg y-o-y 49.1% 0.8% 101.1% 77.9% 25.9% Consensus - - EPS DPS Dividend yield (%) ROE (%) ROA (%) PER (x) BV/share P/BV (x) EV/EBITDA (x) OSK Research See important disclosures at the end of this report 1

2 COMPANY BACKGROUND Listed on Main Market. Prestariang is an investment holding company listed on Bursa Malaysia s Main Market in late July this year with an initial market capitalization of RM198m. Through its subsidiaries, Prestariang is principally involved in the provision of Information and Communication Technology (ICT) services focusing on professional training and certification, as well as distribution and management of software licences relating to its training and certification. Currently it offers 40 certification courses from various technology and software vendors and organizations including Microsoft, IBM, Oracle, CompTIA, Autodesk, EC-Council, Adobe and others. Figure 1: Corporate structure Figure 2: Existing valued partners Starting with the schools. Through its key subsidiary Logisys SB, Prestariang started off as a supplier of a computer hardware and provider of basic ICT literacy training. In 2004, Logisys introduced ICT literacy training for teachers known as Teacher Continuing Professional Development in ICT (TCPD). In the same year, it secured a contract worth RM108.3m from the Ministry of Education (MoE) to provide TCPD training for teachers in public primary and secondary schools in Malaysia. Upon completion of the program in 2007, Logisys had successfully trained about 100k teachers to integrate ICT into classroom teaching. OSK Research See important disclosures at the end of this report 2

3 Eventually moving on to universities. Later on, the group was awarded a contract by the Ministry of Higher Education (MoHE) for the pilot Industry-based Certification Program for a local public university. The program was to provide ICT training and certification to final year students of ICT-related fields to better equip them with industry knowledge. Subsequently, it expanded to the public universities, polytechnics and community colleges as directed by MoHE for a period of 4 years from 2007 to 2010 for a total contract value of RM65m. To date, approximately 19k students have participated in the program. Presence extended to healthcare industry. In 2008, Prestariang further extended its core competency in ICT training to integrate ICT into the healthcare industry. In 2008, the group secured a contract worth RM13.6m from the Ministry of Health (MoH) to implement the Integrated Campus Management System (ICMS) Program by integrating ICT at three government healthcare training institutions in Malaysia. Penetrating more government agencies. In addition to its growing professional training and certification business, Prestariang has also expanded its software division over the years. In 2006, it secured contracts worth a total of RM110m from MoHE for the Managing University Software as an Enterprise (MUSE) program whereby Prestariang supplies Microsoft and Autodesk software licences to all public higher education institutions in Malaysia. Figure 3: Completed projects since 2006 Contracts Commenced Completion Sum (RM m) Ministry ICT training & certification TCPD MoE Industry-based certification for University Teknologi MARA MoHE Industry-based certification for public tertiary education MoHE institutions Software distribution & management ICMS MoH MUSE - Microsoft MoHE MUSE - Autodesk MoHE Included in SJJB. Prestariang is one of the Bumiputera companies listed under the Skim Jejak Jaya Bumiputera (SJJB) incentive program formulated by the Government in 2007 to elevate Bumiputera entrepreneurial capabilities in the economy. The scheme was intended to enhance the participation of Bumiputeras in the equity market. Management led by key promoter. The management team is led by company founder and key promoter Dr Abu Hasan Ismail, which holds an effective 41% stake, being the single largest shareholder. Dr Abu started his career in the academic space as a professor before becoming the first Dean of the Multimedia University s Faculty of Creative Multimedia. Subsequently, he joined the ICT industry in 2000 while continuing to be involved in academic advisory work. Kumpulan Modal Perdana (a subsidiary of Ministry of Finance) and PNB are among the top 3 major shareholders in Prestariang at 9% and 5% equity interest respectively. Figure 4: List of major shareholders Major shareholders Stake Dr Abu Hasan Ismail 41% Kumpulan Modal Perdana 9% PNB 5% OSK Research See important disclosures at the end of this report 3

4 FINANCIALS Revenue subject to orderbook replenishment. At a glance, Prestariang s pro-forma revenue over the last 5 years seems rather volatile. Nonetheless, this is primarily due to the completion of various programs in respective periods. For instance, the group s topline was on a declining trend from FY06 to FY09 before rebounding sharply in FY10 due to completion of the TCPD program awarded by MoE in 2007 and subsequently, the ICMS program awarded by MoH in Its FY10 revenue jumped 48% y-o-y to RM58.5m owing to higher contribution from its software distribution and management business, which witnessed higher sales of Microsoft licences from its MUSE program. Figure 5: Revenue breakdown (RM m) FY06 FY07 FY08 FY09 FY10 Revenue ICT training & certification Software license distribution Relatively more stable GP. At GP level, the numbers are relatively more stable due to better profitability of its ICT training and certification business. Consolidated GP soared 79% from FY06 to RM19.0m in FY08 due to commencement of the Industry-based certification program covering major public tertiary education institutions, which fetched better margins relative to the previous TCPD program. Nonetheless, the company registered a slight dip of 12% in GP in FY09 due to completion of its ICMS program in the preceding. Concurrently, margins from its software licence distribution business retreated 10ppt from 40% in FY08 to 30% by FY10 due to higher sales of Microsoft licenses, which typically yields lower margin. Figure 6: Segmental GP margin (%) (LHS) against consolidated gross profit (RM m) (RHS) 60% 50% 40% 30% 20% 10% 0% FY06 FY07 FY08 FY09 FY GP ICT training & certification Software license distribution OSK Research See important disclosures at the end of this report 4

5 Tax-exempt status until June Earnings at the EBIT level, however, have generally been on an uptrend since FY06. The slight blips in FY07 and FY09 were due to one-off exceptionals amounting to RM2.7m and RM0.1m respectively for fixed assets written off. Netting these off, core earnings showed a sturdy uptrend in the last 5 years, with net profit almost doubling in FY10 due to the increasing contribution from its ICT professional training and certification business on more contract wins as well as higher profit margins on economies of scale. FY10 core earnings stood at RM15.1m, with margin having more than quadrupled over the last 5 years to 26%. Being tax-exempt until June 2015 given its Pioneer Status under MSC, the tax outflows are minimal over the period. Figure 7: Net profit (RM m) (LHS) against net margin (%) (RHS) FY06 FY07 FY08 FY09 FY10 EBIT Core earnings Core earnings margin 30% 25% 20% 15% 10% 5% 0% IPO proceeds amounted to RM16.8m. Coming off its IPO exercise which raised some RM16.8m minus listing expenses, Prestariang is sitting on a comfortable cash hoard of RM24.3m. Operating on an asset light model with minimal capex commitment and generating a strong operating cash flow of RM8.6m in FY10, the company s net cash per share stands at 10.6 sen, some 20% of its current share price. Note that its R&D expenditure is allocated for the development of its in-house training and certification programs. Figure 8: Utilization of IPO proceeds Purpose Amount (RM m) Capital expenditure 2.5 R&D expenditure 6.5 Working capital 6.2 Repayment of term loan 1.6 OSK Research See important disclosures at the end of this report 5

6 INVESTMENT MERITS Synergy between core businesses. We see strength in Prestariang s two core businesses given their synergistic and complementary nature, whereby ICT training and certification is typically provided together with the supply of licences for the software used for training and certifying. This is evident in its execution track record, whereby the Industry-based Certification program was implemented alongside the flagship MUSE program, as both contracts were awarded by MoHE. Its software distribution and management business complements the core professional training and certification division as part of the vertical integration of offerings to better service its clients by providing the relevant software. While some may argue that Prestariang is a technology player, we see strength in its professional training and certification business, which pits it closer to education players such as SEGi, Masterskill and HELP, and hence its substantially higher profit margins compared with other ICT players in Malaysia. Strong orderbook of RM280m. Prestariang has to date secured an orderbook of close to RM280m, with projects spanning 1 to 4 years up to Its anchor projects are the Industry-based Certification program, which has received approval for renewal for another 4 years, and its MUSE program providing and maintaining software licences to all public higher education institutions in Malaysia. Both programs are under the purview of MoHE. Recognized as an engine for future economic growth as Malaysia moves towards becoming a high-income nation, we believe the Government is committed to invest further in the education sector to develop human capital. This could benefit value-added service providers like Prestariang, which plays an important role by arming graduates with practical experience as well as by bridging the gap between an academic learning environment and an actual troubleshoot situation. Moreover, the company adds value by equipping graduates with technical knowledge on various professional IT systems. Figure 9: Ongoing projects Contracts Commenced Completion Sum (RM m) Ministry ICT training & certification Industry-based Certification MoHE Role Based Training Civil Servants MoF, Microsoft IC CITIZEN MoHE Training for students under Malaysian Broadband PC Initiative Ministry of Information Communications and Culture Software distribution & management MUSE - Microsoft MoHE MUSE - Autodesk MoHE Software distribution and management IRB Software distribution and management for public schools and matriculation colleges MoE Software distribution and management MoE Enormous potential with ICT and engineering students. With over 90k students registered under ICT and engineering courses in public tertiary education institutions, we see plenty of low-hanging fruits for Prestariang to pluck. Assuming an average RM3k fees/pax for the provision of professional training and certification, this represents an enormous market of RM280m. Should private education providers also take up the service, this would open up an untapped market worth RM250m, as close to 80k ICT and engineering students were registered under private tertiary education institutions as of OSK Research See important disclosures at the end of this report 6

7 Figure 10: Enrolment in ICT and engineering courses in public and private tertiary education institutions Source: OSK Research, MoHE No. of students Public ICT 22,824 Engineering 68,742 Private ICT 34,359 Engineering 44,666 Superior margins driven by focus on professional training and certification. Given its niche focus in professional training and certification leveraging on its close rapport with Microsoft, Oracle, IBM and Autodesk, we see more upside potential for the group s profit margins going into FY12, and are targeting for Prestariang to close the year at a 36% net margin. The superior margins, relative to its ICT peers as well as education rivals, are also attributed to its stringent opex control, with a total headcount of merely 50 staff, and hence minimal fixed cost. Figure 11: Core earnings (RMm) (LHS) against core earnings margin (%) (RHS) FY06 FY07 FY08 FY09 FY10 FY11 FY12 40% 35% 30% 25% 20% 15% 10% 5% 0% Core earnings Core earnings margin Close relationship with Microsoft most fruitful. Leveraging on its established relationship with Microsoft, Prestariang was appointed by the latter in 2009 to provide ICT literacy training to civil servants and system integrators in Malaysia under the Role Based Training Civil Servants Program and vendor development program respectively, coordinated by Ministry of Finance (MoF). In 2010, it was again appointed by Microsoft as a provider of ICT training for teachers and student development activities under the Partnership for Technology Access Initiative by MoHE as well as a provider of ICT training to students under the Malaysian Broadband PC Initiative sponsored by the Ministry of Information Communications and Culture. These contracts, worth a total of >RM70m, signify its close partnership with Microsoft, which also provides software to Prestariang for distribution and management. OSK Research See important disclosures at the end of this report 7

8 Sharpening focus on in-house innovation. To reduce its dependence on external valued partners in providing professional training and certification, Prestariang focuses on R&D to develop new learning cum training and certification programs in-house by working with partners in related fields. The projects in the pipeline include the English language learning and certification program, Islamic finance training and certification program, as well as Green IT certification program. We like its R&D-centric focus as developing in-house products effectively leads to the creation of its own intellectual property, which could help to boost margins as well as providing a platform for its regional expansion going forward. Management has expressed its intention of venturing to the Middle East region via partnership by marketing its Islamic finance training and certification, which is still being developed at this point of time. Figure 12: In-house developed training and certification programs R&D programs Partner Launch dateline English language learnings and certification Prometric 2H11 Islamic finance training and certification Prometric 1H12 Institute of Islamid Banking and Finance International Islamic University Malaysia Green IT certification e2readiness 2H11 IC CITIZEN the breakthrough. Prestariang launched its first in-house developed ICT certification program known as IC CITIZEN in The program is designed to promote the appropriate use of technology, particularly for today s digital literacy requirements. It aims to impart basic understanding and rules of acceptable behavior when using the Internet and also encourages individuals to be responsible in online communities. The company has also signed a partnership agreement with Certiport to market the certification program on a global basis, leveraging on Certiport s established point-of-sale network with approximately 10,000 centers in 142 countries. Subsequently in 2011, the group was appointed by MoHE to implement the said program to provide training and certification in all public and selected private higher learning institutions for a total contract value of RM28m. More importantly, this also marked its first foray overseas, having obtained a letter of award from the Brunei government to deliver the program to 100 participants. Dividend policy of 50%. Given its sturdy balance sheet and minimal capex requirements apart from R&D expenditure, management has a policy of paying a dividend of up to 50% for the next 3 years. At our forecast earnings, this translates into a lucrative dividend yield of >12% for both FY11 and FY12 as the share price has retraced by close to 50% since the company s IPO in late-july in tandem with the weakness in global equity market sentiment. With its orderbook remaining firmly intact, we expect the company to declare a bumper dividend when it announces its 3QFY11 results, which is slated for release in the second week of Nov OSK Research See important disclosures at the end of this report 8

9 RISKS Dependence on the public sector. Given the nature of Prestariang s business focusing on the provision of training to public education institutions and software distribution for public ministries, close to 90% of its revenue is derived from government contracts secured from MoHE, MoE, and IRB. While there is always a risk that losing government contracts may adversely affect its financial performance, we are convinced that such a scenario is unlikely as the Government is committed to achieving a high-income economy by prioritising the education sector as a form of human capital investment. Moreover, given Prestariang s established execution and implementation track record, we believe the group will enjoy a competitive edge over its peers. Figure 13: Revenue breakdown by sectors (%) Revenue by Sector Public 99% 96% 89% Private 1% 4% 11% Dependence on Microsoft as a major supplier. Microsoft accounted for >65% of Prestariang s total purchases as of FY10. This primarily comprised purchases of Microsoft software licences for the maintenance of computers in government ministries as well as public tertiary education providers. Given its close rapport with Microsoft over the last 7 years, we do not see any significant issues arising. Typically, the company s agreement with Microsoft is renewed annually, with Microsoft granting Prestariang the exclusive right to participate in a selected list of Microsoft software licences. Figure 14: Major supplier as a proportion of COGS (%) Major Supplier in COGS Microsoft 28% 45% 67% Others 72% 55% 33% Foreign currency exposure. 75% of Prestariang s FY10 COGS is transacted in USD while only 5% of its revenue is denominated in that currency. While there is no hedging in place for the time being, we believe the group would be able to pass on any spike in cost by including a buffer in its quotations to cater for foreign exchange fluctuations given the nature of its contracts. Figure 15: Proportion of USD transactions (%) Purchases in USD 2010 COGS 75% Rev 5% OSK Research See important disclosures at the end of this report 9

10 VALUATION AND RECOMMENDATION BUY. We like Prestariang as it is a cheaper proxy to the education sector versus peers like SEG International (BUY; FV: RM2.23), Masterskill (TRADING BUY; FV: RM1.91) and HELP (NEUTRAL; FV: RM2.38). The stock s valuation is extremely undemanding as it is currently trading at an alluring 3.3x FY12 PER, with a dividend yield of >12% p.a. While we do not deny that the stock warrants a discount given its niche focus in the public sector, we believe its current market valuation, which implies a significant 70% discount to its peers, is unjustified given its robust balance sheet, strong earnings growth, towering presence in its niche segment and lucrative dividend payout. Hence, we initiate coverage with a BUY recommendation at a Fair Value of RM0.92, based on a conservative 6x FY12 PER. Figure 16: Peer comparison on FY12 forecasts Listed entity Market Cap Revenue Net margin Net profit P/E Yield P/BV (RM m) (RM m) (%) (RM m) (x) (%) (x) HELP Masterskill SEG Internation Prestariang Source: OSK Research, Bloomberg OSK Research See important disclosures at the end of this report 10

11 EARNINGS FORECAST FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Turnover EBITDA PBT Net Profit EPS DPS Margin EBITDA (%) PBT (%) Net Profit (%) ROE (%) ROA (%) Balance Sheet Fixed Assets Current Assets Total Assets Current Liabilities Net Current Assets LT Liabilities Shareholders Funds Net Gearing (%) - - Net cash Net cash Net cash OSK Research See important disclosures at the end of this report 11

12 OSK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd ("DMG"). All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published by OSK Research Sdn. Bhd., 6th Floor, Plaza OSK, Jalan Ampang, Kuala Lumpur Printed by Xpress Print (KL) Sdn. Bhd., No. 17, Jalan Lima, Off Jalan Chan Sow Lin, Kuala Lumpur OSK RESEARCH SDN. BHD. ( V) (A wholly-owned subsidiary of OSK Investment Bank Berhad) Kuala Lumpur Hong Kong Singapore Malaysia Research Office OSK Research Sdn. Bhd. 6 th Floor, Plaza OSK Jalan Ampang Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) OSK Securities Hong Kong Ltd. 12 th Floor, World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore Tel : +(65) Fax : +(65) Jakarta Shanghai Phnom Penh PT OSK Nusadana Securities Indonesia Plaza CIMB Niaga, 14 th Floor, Jl. Jend. Sudirman Kav. 25, Jakarta Selatan Indonesia Tel : (6221) Fax : (6221) OSK (China) Investment Advisory Co. Ltd. Room 6506, Plaza 66 No.1266, West Nan Jing Road Shanghai China Tel : +(8621) Fax : +(8621) OSK Indochina Securities Limited No. 1-3, Street 271, Sangkat Toeuk Thla, Khan Sen Sok, Phnom Penh, Cambodia Tel: (855) Fax: (855) Bangkok OSK Securities (Thailand) PCL 191, Silom Complex Building 16th Floor, Silom Road,Silom, Bangrak, Bangkok Thailand Tel: +(66) Fax : +(66)