• 2QFY19 core earnings fell yoy due to no delivery of MyKad and lower quantities supplied for passport. This was due to the government drawing down on its existing inventory.

• 1HFY19 core earnings fell 54% as no delivery for MyKAD in 1Q and 2Q consecutively. Overall, 1HFY19 core earnings were below our estimates at 20% of FY19F.

• We cut FY19-FY21F forecasts by 20-46% on lower assumptions for MyKad and passport deliveries.

• Maintain HOLD with lower DCF-derived TP of RM0.45 that implies FY19F PE of 14x before easing to 9x in FY20F.

Disappointment earnings

2QFY19 core earnings slumped 58% yoy to RM8.5m in tandem with weaker revenue. This was due to no delivery made for MyKad and lower quantities of passports supplied as the government continues to manage its inventory. As a result, EBITDA margin notably contracted by 620bps to 28.5%.

Supported by other products

Core earnings grew 12% qoq backed by higher revenue from other business products i.e. auto gate installation & maintenance, security & surveillance projects and distributing printing projects.

No MyKad delivery during 1H19

Its 1HFY19 earnings fell 54% to RM16.0m owing to no MyKad delivery during 1Q and 2Q consecutively. The management believe there is high possibility that MyKad delivery would remain tepid in 2HFY19 before normalising in FY20. Overall, 1HFY19 core earnings were only 20% of our FY19F estimates.

Revisiting our forecast

We cut our FY19F/FY20F/FY21F earnings by 46%/20%/21% as we pair down our expectation on its main products delivery over these periods ie. MyKad and passport. Management noted that the National Registration Department (KDN) would be drawing down on existing inventory before new orders are made.

HOLD at lower TP of RM0.45 (from RM0.50)

We maintain our HOLD call with a lower DCF-derived TP of RM0.45 (WACC: 11%, g: 0%). Our TP implies FY19F PE of 14x and 9x in FY20F. Despite existing order book providing earnings visibility of up to FY21, we believe there is inherent downside risk to earnings given the government's tight budget which could see uncertainty in product deliveries.

Source: BIMB Securities Research - 3 Dec 2018