Friday, December 13, 2013

Analysis of Prestariang Berhad

Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!


Before I begin analysing Prestariang, I would like to give a shout out to Bsngpg (a reader of this blog) for bringing this stock to my attention. Bsngpg, you’re the man! Prestariang is involved in ICT training & certification, education, and software license distribution & management. The company trades on the Bursa Malaysia with the stock code 5204. The stock closed yesterday at RM 2.81 per share (approximately USD 0.87). The company earns mind blowing returns on capital, has high margins and has a solid balance sheet. The only problem is that the stock is a bit too expensive for my liking. Come on stock market, crash already!! All I want is to buy quality companies for less than 5 times earnings and for girls to actually reply my messages on Facebook, is that too much to ask?

Based on my own calculations of adjusted net profit, Prestariang achieved insanely awesome trailing twelve months (ttm) return on average assets and return on average equity of 33.59% and 40.53% respectively. According to my calculations, Prestariang earned ttm adjusted net profit of Ringgit Malaysia (RM) 34.699 million. To arrive at adjusted net income, I added back losses from the education division as it has only started operations this year and it would take some time to become profitable. I also calculated income taxes for the company. The company’s ttm income tax expense was almost non-existent as its main subsidiary is currently exempted from income tax on its statutory income from pioneer activities till the middle of 2015. However, I’m a long-term investor and I have to take into account taxes when assessing the company’s profitability as the company’s tax incentives will eventually expire.

For the 9 months ended September 30, 2013, revenue grew by only 3.61% year-on-year to reach RM88.97 million. While revenue growth was slow, profit before tax (PBT) grew by an impressive 17.78% (PBT is up 36.22% if you exclude the education division) year-on-year to reach RM 31.42 million. If you exclude losses from the education division, Prestariang had a PBT margin of 40.80% for the 9 months ended September 30, 2013.

The reason PBT experienced such strong growth despite revenue being flat is because of higher revenue from the ICT training and certification division which has higher margins. I personally think that it’s more important to look at growth in the ICT training and certification revenue than growth in total revenue. For the 9 months ended September 30, 2013, the company grew revenue from the ICT training and certification division by 65%.

Prestariang has a very strong balance sheet. As at September 30, 2013, the company had RM 52.18 million in cash and short-term investments and only RM 12.34 million in total liabilities. Even if the company set aside RM 12.34 million in cash to cover all its liabilities, the company would still have excess cash of RM 39.84 million. I love excess cash on a company’s balance sheet just about as much as I love extra cheese on KFC’s cheesy wedges, which is a lot!

A significant amount of the company’s revenue is generated from government contracts. There is always the risk that the company’s government contracts won’t be renewed when they expire. According to this article on The Star, government accounts for 60% of Prestariang’s sales today. I truly have no idea as to how high or how low this risk is, but it’s something investors have to think about before investing in the company. I will give credit where credit is due. The company has done well in diversifying its customer base as almost all of the company’s sales were made to the government in 2009. I hope the company can further reduce the percentage of its revenue from government contracts.

The company has adjusted ttm net income (as I discussed earlier) of RM 0.157 per share. Based on yesterday’s closing price, the company would have a P/E ratio of 17.89. If you take into account the company’s excess cash, the P/E ratio goes down to 16.73 which is still a bit expensive. However, Prestariang is a really good quality stock and I guess it’s ok to pay a bit extra for it. I will probably take a small position in the stock next week, if the stock experiences a significant pullback I will buy more. Right now I have other more attractive opportunities that I want to pursue. I also want to maintain my cash holdings at above 25% of my portfolio as I have a feeling that Asian equity markets could get really fucked up in the next few years. Three potential developments could drive the company’s earnings to new heights: 1) the company’s education division could turn a profit in the near future 2) revenue from the ICT training and certification division could continue growing strongly 3) revenue from providing training for the oil & gas sector could increase significantly. I don’t count on these developments happening, but it would be awesome if they do happen.
   

Thank you for reading. I hope you found my analysis of Prestariang useful. To all the bitches out there, just because some guy messages you on Facebook asking stuff like “hi, how was your sem break?” or “have you studied for this exam, yet?” doesn’t mean he wants to fuck you (although in my case, I probably do). A simple reply with a smiley would be cool. Glad I’m done with university, met too many bitches in academia. I would like to clarify that I don’t think all girls are bitches, most of them are alright. In fact, one of my top heroes is a woman (Ayn Rand in case any of you were wondering). Well, I think I will stop writing now as I’m sure I exceeded the “bitch” limit I set for my articles. See you around, bitches!  

4 comments:

  1. Hi Justin,

    Prestariang has an amazing business franchise. The ROA and ROE numbers are impressive given the high net cash positions.

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    1. I agree with you panaceaasia. That's why I don't mind paying for it now, even though its a bit expensive. I do hope that revenue from government drops to 30% or below in the long-term though and that the private sector play a more significant role for the company. Customer diversification is always good.

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  2. Great insight! Made me dig into the company and found out few concerns.

    1) Cornerstone investors are exiting i.e. MOF, EPF and AIA. All of them had ceased as substantial shareholders. While I understand that selling shares can be due to various non-fundamental factors, but with 3 big kaki exiting together it really makes me feel uncomfortable. I hope nothing is wrong behind.

    2) I can say Prestariang is safe for at least another 5 years, until the next general election. Political risk is notably high as the business model is very much weighed by "how many YB you know", a very typical Malaysian business. It is noted that Prestariang is trying to diversify the revenue base, but I would typically shy away from political business.

    3) Anyway, performance wise, Prestariang has been awesome. They are able to make money out of the intangibles and this is one kind of awesome business model, which is why the ROE is so high. If the price is cheap enough, I would also put my money into it.

    Just my 2 cents. :)

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    1. Thanks for your feedback, nice to hear from you as usual! I don't know what to say about cornerstone investors exiting, but I hope its just because of the recent increase in price.

      Yes, I agree with you on the company deriving a large portion of its revenue from the government. If I was CEO, I would make the diversification of the customer base the number one priority in case a significant amount of government contracts are not renewed. I would pay attention to the company's revenue, if private sector doesn't come up to at least 60% of revenue in the medium term I personally would consider selling. I'm not saying that the government contracts won't be renewed, but I'm just not comfortable with the risk.

      I feel the same way as you do, that's why I only took a small position, nothing significant. Will only take a more substantial position if the valuation is lower. I think a number of people are not taking into account tax for the company which is wrong. True the company's tax expense is currently non-existent, but by mid 2015 I think it has to pay taxes like everyone else.

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