MLA 3.0 expected to contribute about 25% of Prestariang sales per annum

This article first appeared in The Edge Financial Daily, on September 6, 2018.
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Prestariang Bhd
(Sept 5, RM1.03)
Maintain neutral with an unchanged target price (TP) of RM1.19:
Prestariang Bhd announced on Tuesday that it had inked a master licensing agreement (MLA) 3.0 with the Malaysian government to be the sole Microsoft Licensing Solutions provider for all government agencies and public training institutes (ILAs). No changes to our earnings forecasts as we have already factored in the earnings contribution from MLA 3.0, which is an extension and renewal of MLA 2.0, into our financial year 2018 (FY18) to FY20 forecasts. The share price has plunged more than 16% over the last three trading days following the poor results in the second quarter of its financial year 2018 (2QFY18). We retain our “neutral” call with an unchanged TP of RM1.19, which yields a potential upside of 12.2%.

 
Following the receipt of the letter of award in January 2018, Prestariang has officially secured the MLA 3.0 contract from the finance ministry. The MLA 3.0 is an extension and renewal of the MLA 2.0 for a period of three years commencing from Feb 1, 2018, until Jan 31, 2021, at an estimated contract value of RM222.6 million. (MLA 2.0 estimated at RM200 million to RM230 million). The new agreement will be expanded to ILAs as its new customer base, with new added scope of services.

Based on 1QFY18 results, MLA 3.0 made up 63.5% of the software and services sales or delivered revenue of RM29.5 million. We suspect there was only a small contribution from MLA 3.0 in 2QFY18, resulting in a maiden quarterly loss for the segment. Based on rough estimates, it is now likely to contribute sales of about RM70 million or 25% of the group sales per annum. Assuming a 10% net profit margin, MLA 3.0 could boost Prestariang’s earnings by RM22 million (earnings per share of 4.56 sen).

As the Microsoft software is denominated in US dollars, it will have foreign exchange currency risks to manage given recent strength in the US dollar. The US dollar has strengthened to the highest level against the ringgit since November 2017, trading at 4.1388 on Tuesday, a 7.2% gain since the low of 3.87 in March. Further strength in the US dollar could suppress its margins as a result of foreign exchange losses. — PublicInvest Research, Sept 5