Datasonic likely to win auto gate solutions contract in Johor

TheEdge Tue, Feb 04, 2020 10:29am - 4 years View Original


Datasonic Group Bhd
(Feb 3, RM1.44)
Maintain buy with an unchanged target price (TP) of RM1.96:
We deem a change of scope for a contract to supply passport chips as a win-win solution that will elevate Datasonic Group Bhd’s earnings, while the government can enjoy savings by recalibrating the chip supply quantity and leaving the total contract sum unchanged. This additional scope is within our expectations and we believe the news will still underscore the management’s capabilities in securing new contracts.

Datasonic has received an additional work scope to be included under the existing Malaysian passport chip supply contract from the home ministry (KDN). The additional work scope includes maintenance of the hardware and software of auto gates and chips, equipment and the application of public key infrastructure (PKI) and the public key directory (PKD) at a value of RM38.25 million.

Concurrently, the KDN reduced the quantity of passport chips from 12.5 million to 11 million amounting to RM38.25 million, leaving the total contract sum unchanged at RM318.75 million. Recall the initial contract awarded to Datasonic in 2015 for 12.5 million passport chips, expiring on Nov 30, 2021, was at RM318.75 million.

We believe the agreed new work scope under the existing passport chip supply contract is favourable to the government and Datasonic. Instead of experiencing a long process and committing to an additional contract for these works, the government can generate savings by recalibrating the chip supply quantity based on the current burn rate of about two million per annum (pa) and the outstanding quantity of about 6.3 million units. However, this will contribute positively to Datasonic’s earnings with an additional revenue of RM15 million pa. The company can also recognise unbilled revenues retrospectively from May 2019, in which most of the costs have been expensed. This announcement and potential earnings contributions are within our expectations and have been imputed into our forecasts.

Following the additional work scope, Datasonic is now the integrated service provider for the KDN in high-security immigration-related solutions, including passport chips and booklets, polycarbonate data pages, PKI and the PKD, as well as auto gate maintenance. We believe with a higher barrier of entry to solutions concerning national security, Datasonic has a good chance of clinching a new contract to supply auto gate solutions at Bangunan Sultan Iskandar in Johor.

Next in the line would be the foreign visa system (VLN), expected in February and the national integrated immigration system, with the tender closing on March 4.

Our forecasts are unchanged as the additional work scope is within our expectations. Our TP remains at RM1.96 based on 39 times financial year ending March 2021 forecast price-earnings ratio — implying a 0.5 times probability of the hypothetical value of RM1.44 per share from the VLN.

We believe multiple contract extensions and Datasonic’s proven track record continue to underscore the management’s capabilities in securing new contracts. Key downside risks include fluctuations in orders and discontinuation of contracts. We note that failure in the VLN contract bid may see Datasonic’s TP reverting to the previous RM1.21. — RHB Research Institute, Feb 3

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