• Percetakan Keselamatan Nasional S/B (PKN) launched a legal action against Datasonic, claiming c.RM25m. This is in relation to the printing services of 1.5 million passport booklets.

• Datasonic believes the amount is much less; it has provided a contingent liability of RM5m, should the case be in PKN’s favour.

• Based on our estimates, the claims should have minimal earnings impact to Datasonic. As at end Dec 2017, its orderbook stands at c.RM743m, providing visibility up to FY23F.

• Maintain BUY with an RM1.20 DCF-derived TP which implies a FY19F PE of 20x before easing to 18x in FY20F.

About the claim

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.

Details of event

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.

Expect compensation to be lower

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.

Maintain BUY with TP of RM1.20

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