‘Datasonic needs more contract wins to justify valuation’

KUALA LUMPUR: Just over two weeks into the new year, Datasonic Group Bhd’s share price, which has continued to climb after tripling last year, hit a five-year high of RM1.61 last Friday, following news that it has obtained a one-year contract extension to supply raw MyKads and related consumables to the government.

The stock’s unabated growth momentum, started in June last year, has pushed its trailing price-earnings ratio to 43.98 times — the highest among those in the e-government service providers’ space (see table). One fund manager pointed out the stock’s current earnings do not justify its high valuation. More contract wins are needed, he told The Edge Financial Daily, declining to be named.

To RHB Investment Bank Bhd (RHB IB) analyst Lee Meng Horng, the prospect of that looks good at this juncture.

“We believe the company is also on the verge of clinching the public key directory and public key infrastructure-related solutions alongside its auto-gate maintenance as it has been carrying out the maintenance-related works. Beyond this and the foreign visa system (VLN), the group has also participated in the request-for-proposal for the National Integrated Immigration System, another much-sought after project that could be worth RM1 billion to RM1.5 billion,” Lee said in a note to clients last Friday.

RHB IB also thinks Datasonic stands a good chance to secure the VLN, which is in the software/systems space and could serve to further rerate the company, whose existing business is well-known and valued in the hardware and equipment space. “Besides, it could potentially be a significant income booster to near-term earnings and a thematic play for Visit Malaysia 2020,” Lee said.

In addition, Lee said Datasonic is keen to participate in projects like the supply and replacement of auto-gates nationwide, electronic medical records, digital IDs, the Philippines’ National Identity System and Security Surveillance and Monitoring Solutions projects, as well as the supply and maintenance of auto-gate systems in the Middle East.

“We believe its ability to clinch multiple contract extensions is testament to its capabilities and continues to reinforce the optimism among investors of its chances for future new contract wins,” said Lee, adding that RHB IB is maintaining its “buy” call on the stock, with a target price (TP) of RM1.96, giving a 21.7% upside from its current share price.

“However, we note that failure in the VLN contract bid may see the TP reverting to the previous level of RM1.21,” said Lee.

One anonymous analyst also cautioned that bidding for a contract is not the same as winning it. “They can bid but there is no guarantee it can win the contracts,” the analyst said.

The analyst also said the barriers for entry into the provision of secured ID documents are not that high, as long as one can get the licence to print such documents from the government and provide a higher quality and more cost-effective solution.

As for the VLN contract, the analyst said MyEG Services Bhd (MyEG) is a contender to be watched. “MyEG is an e-government service provider, but they are slightly different. Yes, Datasonic can provide similar systems, but what MyEG does is that they provide value-added services. For example, with foreign worker visa renewals, they also provide things like foreign worker insurance,” the analyst explained.

Datasonic’s net profit for the six months ended Sept 30, 2019 (6MFY20) grew 75% to RM27.83 million from RM15.91 million a year ago, as revenue strengthened 15% to RM121.86 million from RM106.09 million. Its consensus net profit forecast for FY20 is RM66 million, a recovery from the RM36.53 million it posted for FY19, 46% lower than FY18’s RM67.24 million. For FY21, the consensus is a net profit of RM68 million.

Year to date, Datasonic shares have climbed 9%. Last Thursday, it announced the one-year extension till end-2020 for its MyKad contract, originally to have ended on Dec 31, 2019.