Datasonic’s other contracts in pipeline to enhance earnings visibility

KUCHI NG: Dat a s onic Group Bhd’s ( Datasonic) other cont rac ts in the pipeline, outside its current stronghold in the MyKad and nat iona l passpor ts space, if materialised, could further enhance the group’s earnings visibility going into 2017.

According t o RH B Research Institute Sdn Bhd ( RHB Research), with the outstanding balance of the group’s passport data- page contract set to be completed by the first quarter of financial year 2017 (1QFY17) ( March), Datasonic is negotiating for a five-year extension of 13-13.5 million copies.

RHB Research estimated that this potential extension is worth some RM360- 380 million, assuming an average selling price (ASP) of RM28 per unit.

“This will bring about an improvement in the group’s overall profitability, given that most of the production equipment, hardware and processes are already in place,” the research house said.

RHB Research noted that outside the MyKad and national passport space, management is striving to secure a contract involving the revamp of Malaysia’s national border control system.

Alt hough details are scant at this juncture, the research house believed the job will involve upgrades of the country’s existing border control system to potent ial ly pave the way for the int roduct ion of biometric authentication at all immigration checkpoints.

It estimated that the contract could be worth RM200- 250 million per annum ( pa) over a two-year tenure, with annual maintenance of RM50 million pa to commence thereafter.

On any potential overseas venture, RHB Research highlighted that the group is eyeing potential joint ventures ( JVs) to bid for regional security- related projects.

Based on the research house’s channel checks, Datasonic is looking to secure a multiyear border control- related security contract in one of the developing countries.

Assuming Datasonic holds a 51 per cent stake, RHB Research believed the group’s maiden overseas foray could bring in topline/earnings accretion of RM35- 40 million/ RM8-10 million pa respectively over a period of 8-10 years.

“While this may not be significant for now, we see this as a good start to transform itself into a regional player within the security solutions space,” the research house said.

With Datasonic set to release the group’s 1QFY17 results on August 26, RHB Research expected core earnings to come in at RM18-21 million, largely in line with its FY17 estimate of RM80.1 million.

There search house gathered that delivery of Datasonic’s MyKad units reached 1.8-2 million during this quarter.

With no changes made to its forecasts, RHB Research also maintained ‘ buy’ and its target price at RM2.00 per share based on 25- fold 2017F priceearnings ( P/ E) ( FY16- 19F earnings compound annual growth rate (CAGR) of 25.3 per cent).

“Datasonic remains as our top pick within the technology sector,” it said.

RHB Research used discounted cash flow ( DCF) as a corroborative methodology and derive a valuation range of RM1.38-2.21 (depending on the scenarios).

The research house’s target price fell into this DCF- derived valuation range.