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Wednesday, March 16, 2016

Brokers Report: Datasonic Group - Gunning for New Jobs

Maintain Buy with Unchanged Target Price (TP) of RM1.87

Datasonic Group Bhd
Datasonic is looking to secure MYR800m-1bn worth of contract extensions and new jobs in 2016 which, coupled with the recent passport chips job win, would likely propel earnings to a new high in 2017. As such, we continue to advise investors to accumulate the stock. Maintain BUY with our TP unchanged at MYR1.87 (45% upside, 25x 2017F P/E).

MyKad renewal forthcoming as the existing MyKad contract is set to expire by mid-2016
Management is working on a potential renewal by proposing the national identification card’s next generation. We expect an official award by June. We are currently imputing for new MyKad and MyKad consumables contracts at 12m units each to be delivered over a 3-year tenure. Based on an average ASP of MYR17.50 per MyKad and MYR4.00 per MyKad consumable, the renewals could be worth MYR250m-260m. Data-page extension in the works. For its existing provision of data-pages for Malaysian passports, Datasonic has an outstanding orderbook of 3.2m copies as at Dec 2015. With the remaining balance set to be fully exhausted by 1Q17 the group is negotiating a 5-year extension of 13m-13.5m copies. We estimate that this potential extension is worth MYR370m-390m, based on an existing MYR28.40 ASP. We expect an official award to take place in 3Q16. Passport book supply contract around the corner. 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, ie on 1 Dec 2016. Our checks with sources indicate that the contract would cover 13m-13.5m copies to be procured over a 5-year tenure at a total value of MYR210m-230m.

Eyeing new initiatives
Beyond that, Datasonic is eyeing to roll out its security camera solutions 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 MYR100m-120m. 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 for potential joint-ventures (JVs) 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 260m.

Key risks include potential delays in renewals of its existing MyKad and passport data-page contracts and further delays in finalising the longanticipated passport booklet contract
Maintain BUY. Given the appealing upside of over 45%, we maintain our BUY call with our TP unchanged at MYR1.87 (based on 25x 2017F P/E). We used DCF (based on 8.1% WACC and 1.5% TG rate) as a corroborative methodology and derived a valuation range of MYR1.29-2.00 (depending on the scenarios). Our TP falls into this DCF-derived valuation range.

Source: RHB Research - 16 March 2016

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