INVESTMENT MERIT

Management remains optimistic that orders could resume despite the absence of orders for MyKad cards and chips over the past three quarters. Meanwhile, tenders for a few government contracts could be opening up soon that may benefit DSONIC, but uncertainty remains as its MyKad and JPN personalisation centre maintenance contracts are due to expire this year. “Not-Rated” call and a fair value of RM0.500, based on FY20E PER of 17.0x.

Possible recovery? Despite having no delivery orders of MyKad cards and chips over the past three quarters, management remains optimistic on the prospects of the group’s MyKad project in view of the government’s low inventories of MyKad cards and chips. Should the authorities resume ordering MyKad at 1.0m units (as in 4Q18), the group’s 4Q19 earnings could improve by RM12m, based on our backof-the-envelope calculation.

Eyeing other contracts. Management noted that tenders for a few other government contracts could be opening up soon (as early as Apr 2019). These include the immigration system upgrade project, i-KAD for foreign workers, tourism visa application, all of which DSONIC intends to participate in. With its delivery track record of internationally recognised passports and trusted ID cards, we believe the group stands a fair chance of capitalising on these opportunities. To give some context, we estimate that the abovementioned contracts could collectively offer revenue potential of RM400-500m per annum, which we have not factored into our estimates.

Uncertainty remains. On the flip side, we caution that the Malaysian government may be looking to review existing government projects, which could create a certain amount of uncertainty. Note that DSONIC’s maintenance services for JPN’s personalisation centres and MyKad contracts are due for expiry on 30 Apr 2019 and 31 Dec 2019, respectively. Although the MyKad contract has not been completely fulfilled, we understand that there are no ramifications for the government upon expiry without full delivery. These two contracts have a remaining value of RM167.0m, which constitute 21% of the group’s balance order book of c.RM788.0m. Nevertheless, even after stripping out the two contracts that are due to expire this year, DSONIC’s balance order book of RM621.0 should be able to comfortably provide 2.5-3 years visibility.

“Not Rated” with a fair value of RM0.500. We forecast FY19E/FY20E CNP of RM44.3m/RM59.7m. The growth in FY20 is driven by: (i) revenue growth of 7% mainly from its passport delivery, (ii) improvement in margins given that some of its machines have been fully depreciated. Our Target Price of RM0.500 is based on FY20E PER of 17.0x, in line with MYEG’s FY20E PER of 17.8x, but at a premium to IRIS’ FY20E PER of 8.5x, due to its Main Market status (vs. IRIS’ ACE Market status). While DSONIC could be a beneficiary of new government contracts, we opine that its current valuation (FY20E PER of 17.5x) offers limited margin of safety. However, we note that DSONIC could re-rate, should it be able to secure new major contracts.

Risks to our call include unexpected cancellation of contracts, failure to renew contracts before expiry and cost overruns.

Source: Kenanga Research - 25 Mar 2019