This article first appeared in The Edge Financial Daily, on March 17, 2016.

Datasonic Group Bhd
(March 16, RM1.37)
Maintain buy with an unchanged target price (TP) of RM1.87: Datasonic Group Bhd is looking to secure RM800 million to RM1 billion worth of contract extensions and new jobs in 2016, which coupled with the recent passport chip job win, would likely propel earnings to a new high in 2017. As such, we continue to advise investors to accumulate the stock.

MyKad contract renewal is forthcoming as the existing one is set to expire by mid-2016. Management is working on a potential renewal by proposing the next-generation national identification card. We expect an official award by June. Based on an average selling price (ASP) of RM17.50 per MyKad and RM4 per MyKad consumable, the renewals could be worth RM250 million to RM260 million.

For its existing provision of data pages for Malaysian passports, Datasonic had an outstanding order book of 3.2 million copies as at December 2015. With the remaining balance set to be fully exhausted by the first quarter of 2017 (1Q17), the group is negotiating a five-year contract extension of 13 million to 13.5 million copies. We estimate that this potential contract extension is worth RM370 million to RM390 million, based on an existing RM28.40 ASP. We expect an official award to take place in 3Q16.

To complete its national passport offerings, Datasonic is finalising its discussions with the government for the provision of the passport book. We expect the official award to take place by end-March. We believe the official commencement date is likely to coincide with its passport chip contract, which is on Dec 1, 2016. Our checks with sources indicate that the contract would cover 13 million to 13.5 million copies to be procured over a five-year tenure at a total value of RM210 million to RM230 million.

Beyond that, Datasonic is eyeing to roll out its security camera solution in the Klang Valley after having installed close to 600 cameras in Penang for local municipalities. Management is looking to install 3,000 cameras and to set up surveillance centres for the municipalities involved. The contract could be worth RM100 million to RM120 million. In addition, management intends to penetrate into other national security-related projects, possibly in neighbouring countries, over the medium term. For a start, the group is eyeing potential joint ventures to bid for security-related projects in Indonesia. This, if it materialises, could be even more lucrative than its current home market in Malaysia, given Indonesia’s population size of close to 260 million.

Key risks include potential delays in renewals of its existing MyKad and passport data-page contracts, and further delays in finalising the long-anticipated passport booklet contract.

Given the appealing upside of over 45%, we maintain our “buy” call with our TP unchanged at RM1.87 (based on 25 times financial year 2017 forecast price-earnings ratio). We used discounted cash flow (DCF) (based on an 8.1% weighted average cost of capital and 1.5% terminal growth rate) as a corroborative methodology and derived a valuation range of RM1.29 to RM2 (depending on the scenario). Our TP falls into this DCF-derived valuation range. — RHB Research Institute, March 16