PKN launched legal action against Datasonic for printing contract of 1.5 million passport booklets; PKN is seeking RM24.975m worth of compensation for booklets printed for Datasonic from 1 Dec 2016 to 31 May 2017 when PKN was its sub-contractor.
To recap, Datasonic received Letter of Award (LoA) in Apr 2016 from the government to supply passport booklet to the Immigration Department of Malaysia. It appointed PKN as the sub-contractor for the delivery of 1.5 million passport booklet. The disagreement arose on the pricing of the printing service; PKN requested for a higher price than what Datasonic offered. The negotiations reached an impasse albeit PKN delivered on the order.
Datasonic expects the claim to be lower; it provided a contingent liability of c.RM5m, should the court decide in PKN’s favour. Based on our estimates, this would have minimal earnings impact to Datasonic. As at end Dec 2017, the company has an orderbook amounting to RM734m. This provides earnings visibility of up to FY23F.
Despite the legal suit, we remain positive on Datasonic and reiterate our BUY recommendation with a DCF-derived TP of RM1.20 (WACC: 5.1%, g: 1%). This implies FY19E PE of 20x and 18x in FY20E which we believe is fair even with concerns of the new PH government breaking up monopolies. We believe its strong track record to deliver services at a competitive cost provides the company an edge over potential new entrants.
Source: BIMB Securities Research - 1 Aug 2018
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