This article first appeared in The Edge Malaysia Weekly on March 18, 2024 - March 24, 2024
THE federal government’s ongoing digitalisation initiative has seen some RM1.3 billion worth of contracts being given through various ministries and agencies in the past year to five local companies listed on Bursa Malaysia, data compiled by The Edge shows.
Shares in REDtone Digital Bhd, Datasonic Group Bhd, Heitech Padu Bhd, AwanBiru Technology Bhd (Awantec, formerly known as Prestariang Bhd) and Edaran Bhd have rallied over the last 52 weeks. Consensus view on their earnings prospects is lacking, however, given that only Datasonic has active analyst coverage, according to Bloomberg data.
The margins and longevity of their respective contracts are among questions on the minds of investors looking to gauge whether there is further upside to the share price run, though none of the five have had their contracts terminated since the change of government in November 2022.
On March 14, the Kuala Lumpur High Court ordered the government to pay Awantec’s unit Prestariang Skin Sdn Bhd (PSKIN) RM231.5 million for unilaterally terminating the National Immigration Control System (SKIN) project in 2019. The SKIN project — now called the National Immigration Information System (NIISe) — is still up in the air, following the current government’s decision to terminate the RM1.12 billion contract that was awarded to Iris Corp Bhd in August 2023.
In terms of headline numbers compiled by The Edge, Edaran is the biggest winner among the five, having secured three contracts totalling RM446.44 million for which execution is spread over 48 months.
Over the past 12 months, Edaran’s share price had rallied 150% to RM1.25 as at March 14, valuing the group at RM75 million. It should be noted that prior to Nov 7, 2023 — when Edaran’s volume spiked to 42.72 million — the simple 15-day moving average (SMA) of the volume of its traded securities was less than 35,000 units. As at March 14, 2024, Edaran’s 15-day SMA was 1.77 million units.
Assuming that revenue from the three contracts totalling RM446.44 million is spread evenly over four years, Edaran would see RM111.61 million revenue from these contracts per year over four years — 1.6 times above Edaran’s revenue of RM69.43 million in the financial year ended June 30, 2023 (FY2023).
Edaran made around RM2 million in net profits in two out of the previous three financial years. Historically, the company had thin net profit margins. For FY2023, its net profit margin was 2.92%, while it was a razor-thin 0.0011% in FY2022. Assuming a margin of 2%, that simple average of RM111.61 million would give it RM2.2 million in profits.
Meanwhile, Datasonic has received at least three six-month extensions for its contract to supply passport chips, polycarbonate biodata pages, and documents, as well as MyKad, MyTentera and MyPOCA raw cards and consumables.
On June 13, 2023, Datasonic received an amendment to the contract for the supply of the Malaysian passport chips that it secured in November 2021. It was the second additional ceiling value for the Malaysian passport chips contract awarded by the Ministry of Home Affairs. From the original RM318.75 million worth of passport chips that had been awarded to Datasonic in November 2021, the contract had grown to RM447.95 million, and extended until May 2024.
It must be noted, however, that Datasonic will recognise revenue from the contract only when a passport or MyKad is issued. It remains to be seen whether the government would, like Singapore, extend the validity of passports from the current five years to 10 years.
According to Bloomberg data, the mean consensus for Datasonic’s net profits is RM74.73 million for the year ending March 31, 2024 (FY2024), and RM83.87 million for the year ending March 31, 2025 (FY2025). This gives Datasonic a forward PER of 15.71 times for FY2025, based on the current share price of 44 sen. The other four companies, without active analyst coverage, were trading at more than 20 times historical earnings at the time of writing.
Of the three analysts who cover Datasonic, two have a “buy” call on the stock in the latest reports on March 1, 2024. RHB Research ascribed a target price of 62 sen to Datasonic, while Inter-Pacific Research has a 64 sen target on the stock. MIDF Amanah Investment Bhd has a target price of 46 sen, with a “neutral” call.
In the March 1 report, RHB Research notes that the 4QFY2024 numbers for Datasonic are expected to trend higher on the back of sustained strong demand for passport solutions, pent-up orders for MyKad — following the contract extension secured in January — and positive price adjustments for the contract extensions.
“Management remains confident of clinching the long-term contracts for identity card and passport solutions, along with the new hardware and printing systems. Datasonic is also eyeing a foreign passport project, MyKid, as well as an auto-gate solutions job,” the research firm notes, adding that the group’s outstanding order book is at about RM409 million, providing 1.2 times cover ratio.
Meanwhile, REDtone’s RM398.1 million MyGovUC3.0 contract, which commenced on Feb 1 this year for a period of 60 months, is expected to bolster earnings. That works out to a simple average of RM79.62 million a year in revenue.
In the financial year ended June 30, 2023 (FY2023), REDtone recorded a net profit of RM57.465 million on the back of RM214.65 million revenue, significantly higher than the RM39.46 million net profit and RM158.04 million revenue in FY2022.
For the six months ended Dec 31, 2023 (1HFY2024 ending June), however, REDtone’s net profit was RM14.4 million, down 59.2% compared with RM35.35 million in 1HFY2023, even though revenue was 51.5% higher at RM144.89 million, from RM95.64 million over the same period.
REDtone closed at RM1.01 on March 14, giving it a RM780.7 million market capitalisation, about 28% short of the company’s target of a RM1 billion market capitalisation (see “REDtone aims to get to RM1 bil within five years, eyes regional growth” on previous page).
Awantec’s market capitalisation was RM350.7 million at its 44.5 sen close on March 14, up 1.14% year to date.
HeiTech Padu’s market capitalisation was RM245.92 million, as it closed at RM2.43 the same day, up 224% year to date.
More projects could come their way, given that the government’s digitalisation programme is still ongoing to harness greater efficiency from investments in the civil service and digital infrastructure to bolster the economy.
Under Budget 2024, the government had outlined digital economy initiatives such as a RM250 million allocation to replace and extend coverage of WiFi in all public universities, including a digitalisation project at teaching hospitals; an RM800 million allocation to implement MyDigital Madani to continue digital connectivity across 3,700 schools and 47 industrial areas by 2025; a RM60 million allocation to develop 5G cybersecurity testing framework and local expertise in 5G technology to enhance preparedness against cyber threats; and expediting the development of the National Digital Identity.
In other words, the jury is still out on who will emerge as the biggest winner in the government’s digitalisation drive.
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