FACED with a cash flow strain on its operations, Prestariang Bhd has proposed a private placement in order to keep the business up and running.
Clearly, the information technology (IT) player is short of cash for immediate needs, considering that the bulk of the proceeds raised will go towards paying money owed to suppliers, staff costs such as salaries and EPF contributions as well as office related expenses such as rents and utilities.
The remaining amount is expected to be used to pare down its debt.
The company is also in the midst of undertaking cost-optimisation efforts and disposing of some assets to raise cash for working capital and reduce borrowings.
An analyst tells StarBizWeek that the proposed private placement is only a stop-gap measure for Prestariang.
“To sustain for the longer term, the existing operations of the company must improve. We need to see better profits from Prestariang’s software distribution business.
“Its education arm, the University Malaysia of Computer Science & Engineering (UniMY), must also stop bleeding, ” the analyst says.
Meanwhile, RHB Research Institute analyst Lee Meng Horng describes the proposed private placement as “necessary” and is part of the action plan to address Prestariang’s going concern.
He says the company’s net gearing is expected to lower to 0.36 times from the 0.47 times level, post-exercise, on the back of reduced borrowings.
However, he thinks that the private placement will have a near-term dilution to the company’s earnings per share.
“Maintain sell, trading at price-to-earnings ratio of 29 times, as we are still concerned on the uncertain outlook of its core business despite the potential upside from the prospective compensation on Skim Kawalan Imigresen Nasional (SKIN), ” he says in a note earlier.Currently, fund management firm Areca Capital is the single largest shareholder of Prestariang through its Dynamic Growth Fund, with a 16% stake.
It is followed by Affin Hwang Multi-Asset Fund, which holds 8.29%.
Interestingly, these two shareholders emerged in Prestariang, the same day founder Abu Hasan Ismail disposed of his 24.3% stake on margin call.
Despite no longer being a shareholder, Abu Hasan remains as the president and group chief executive officer of the company.
On Jan 21, Prestariang announced its proposal to place out up to 10% of its outstanding shares, by issuing up to 48.23 million new shares.
Assuming an issue price of 40 sen per placement share, Prestariang expects to raise RM19.29mil from the private placement.
This proposal is made some two months after the company’s independent auditor issued a statement of “material uncertainty related to going concern”.
In layman terms, the auditor has significant doubt on Prestariang’s ability to continue business and to meet financial obligations that fall due.
Prestariang plans to allocate about 66% or RM12.66mil from the RM19.29mil private placement proceeds for working capital, which will be used within a year. Meanwhile, a further 31% or RM6mil is earmarked for repayment of bank overdraft facility within six months.
Through the repayment, Prestariang will derive gross interest savings of about RM480,000 yearly.
The remaining RM630,000 from the proceeds will be used to pay for the private placement expenses.
However, Prestariang has said that the shares will not be placed to its directors, major shareholders, chief executive or interested persons connected with such directors, major shareholders or chief executive.
Nominee corporations would also not be able to participate, unless the names of the ultimate beneficiaries are disclosed.
Prestariang faced a major setback in 2018 after its biggest project in hand, the RM3.5bil border-control SKIN project, was terminated by the Pakatan Harapan government.
The 15-year project entails two phases; first three years for system development and installation and the next 12 years for operations.According to CGS-CIMB Research, Prestariang has spent about RM200mil to develop SKIN.
Prestaring is only supposed to be paid from the fourth year onwards after SKIN’s full commissioning.
The first three years, which was for the development of SKIN, is privately funded by the company.
It was previously reported that Prestariang had secured RM1bil in bank financing to fund the project.
While the project had yet to commission, Prestariang had reported revenue of about RM175.5mil for SKIN up to the financial year ended June 30,2019.
However, since the contract has been terminated with no compensation from the government to date, the RM175.5mil revenue is recognised as trade receivables and as a result, has affected the company’s cash flow.
Prestariang had sued the government for unilateral termination and is claiming RM732.8mil in compensation.
The lawsuit is ongoing, but in the event Prestariang wins the case, the company’s cash flow problem will likely come to an end.
“If Prestariang succeeds in winning the lawsuit, the RM732.8mil compensation would be equivalent to RM1.51 per share. A major de-rating catalyst is no compensation from the government for SKIN’s cancellation, ” said CGS-CIMB Research analyst Ivy Ng.
The potential multi-million-ringgit compensation is also the X-factor that could excite investors for Prestariang’s proposed private placement.
For now, Prestariang remains in a huge net debt position of nearly RM58mil, although it has returned to a positive operating cash flow in the first quarter ended Sept 30,2019.
Its cash and cash equivalents as at Sept 30 last year stood at RM4.58mil against total borrowings of RM62.56mil.
Nearly 42% or RM26.13mil of its total borrowings are short term in nature.
In the effort of improving its cash flow, in addition to the proposed private placement, Prestariang has said that it is actively working to monetise its assets.
However, it did not name the assets.
CGS-CIMB Research’s Ng has said previously that Prestariang had indicated that it planned to divest its UniMY stake.
“We understand many suitors are keen on buying UniMY. We hope the sale of UniMY will happen in FY20, ” she said in a note on Dec 2,2019.
Prestariang’s share price closed at 36 sen yesterday. The stock has plunged by over 88% since its record-high of RM3.13 in Jan 12,2016.
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