Prestariang Bhd
(April 16, 48 sen)
Maintain reduce with an unchanged target price (TP) of 26 sen: On Monday, Prestariang Bhd subsidiary Prestariang SKIN Sdn Bhd (PSKIN) filed a legal claim totalling RM732.8 million from the Government of Malaysia for the government’s unilateral termination of the Sistem Kawalan Imigresen Nasional (SKIN) project by way of expropriation. The sum payable is calculated based on the contractual formula provided in the concession agreement (CA) which had been agreed upon by the government.

Both parties had earlier engaged in a few rounds of negotiations after the government cancelled the SKIN project but were unable to reach an amicable settlement on the quantum. As a last resort, the board of Prestariang is now compelled to litigate for its contractual payment. In its legal claim, PSKIN highlighted that the CA clearly spells out the government’s obligations in the event that the SKIN project is unilaterally terminated by way of expropriation. Prestariang indicated that PSKIN has never defaulted on the CA.

This news is a negative surprise to us as we previously expected both parties to come to an agreement on the compensation for Prestariang’s loss of the SKIN concession project. The RM732.8 million compensation that PSKIN is seeking is much higher than our RM520 million estimate, that is the net present value of the availability charges (similar to power purchase agreements). However, we do not have the finer details of the CA. At RM732.8 million, compensation to Prestariang (Prestariang owns a 70% stake in PSKIN) is RM513 million or RM1.06 per Prestariang share. This would be 46 sen above its current share price.

According to the CA, the government is supposed to pay the full compensation by July 19, 2019. However, Prestariang’s legal case against the government may be a long-drawn affair. We are also unsure if there would be any negative impact on its other businesses with the government, like the Master Licensing Agreement 3.0 (MLA3.0) project. The MLA3.0 is a contract for the sale of Microsoft software to the government’s agencies nationwide, from February 2018 to January 2021.

We maintain our earnings per share forecasts and TP, based on an unchanged asset-based one time financial year 2019 price-to-book value. Major derating catalyst is no significant compensation from the government for loss of the SKIN project. Key upside risk is significant compensation from the government. — CGSCIMB, April 15