• 3QFY19 core earnings fell 19% yoy due to lower delivery for MyKad consumables and passport as well as higher depreciation following a factory acquisition in 1QFY19.

• Qoq, core earnings surged 39% despite lower revenue. This was due to prevalent cost control initiatives.

• Overall, 9MFY19 core earnings trailed ours and consensus’ estimates at 64% and 63% respectively.

• We cut FY19-FY21F forecasts between 8-14% on higher net opex assumption as we had initially expected it to be lower.

• Maintain HOLD with lower DCF-derived TP of RM0.43 (from RM0.45). Sell on strength.

Disappointment in earnings

3QFY19 core earnings fell 19% yoy on the back of lower delivery of passport components and MyKad consumables as the government continues to manage its inventories. Earnings were further dragged by higher depreciation recognised owing to acquire of factory in 1Q19 for smart card production.

Supported by other products

On qoq basis, core earnings surged 39% despite lower revenue from CCTV project as net opex fell in tandem with ongoing cost control initiatives undertaken

Revisiting our forecast

Despite revenue being inline, 9MFY19 core earnings trailed ours and consensus’ estimates at 64% and 63% respectively. This was due to higher-than-expected opex which we had initially expected to decline further in tandem with its cost control initiatives. We pare down our earnings estimates for FY19F/20F/21F by -12%/-8%/-14% on higher net opex assumption.

Dividend declared

A third interim DPS of 0.5sen was declared (YTD: 2sen), implying a 75% dividend payout. Overall, the 9M18 DPS declared amounts to 1.9sen which makes up 50% of our expectations.

HOLD at lower TP of RM0.43 (from RM0.45)

Maintain HOLD with a lower DCF-derived TP of RM0.43 (WACC: 11%, g: 0%) which values the stock at FY19/20F PE of 15x/ 9x. Despite its outstanding orderbook of c.RM788m providing earnings visibility of up to FY21F, we see downside risk to earnings. The government’s tight budget could see inconsistent product deliveries and thus earnings recognition. Sell on strength.

Source: BIMB Securities Research - 1 Mar 2019