INVESTMENT MERIT

With its technical knowhow, we believe IRIS is a strong contender for a possible IC contract tender. The group has been divesting non-core assets to re-align its business focus on Trusted ID. Based on Trusted ID’s earnings per se, the stock is only trading at 7x FY19E PER, even before factoring in any IC contract. The share overhang situation caused by a GLC shareholder is likely to blow over soon. Trading Buy with a FV of RM0.200.

Strong contender for upcoming government contracts. We believe the tender for the supply of MyKads could possibly be opened up soon, given that the existing RM260m contract (carried by a competitor currently) is expiring end-2019. Although MyKads have not been fully delivered under the existing contract, we understand that there are no ramifications upon the expiry. We believe it is also in the Malaysian government’s best interest to open up the tender to ensure fairer competition and better pricing, and IRIS’ technical knowhow and capabilities in digital ID render it a strong contender for the contract. Based on our back-of-envelope calculation and assuming 15% lower contract value, we estimate that the IC contract could generate c.RM15m PAT (c.30% of FY20 CNP) annually from FY21 onwards.

Out with the old, in with the new. It is interesting to note that there has been a change in substantial shareholders, which saw Dato' Rozabil Abdul Rahman (executive director of IRIS) rapidly paring down his stake in IRIS, from a peak of 320m shares (10.8%) on 21 Sep 2018 to 117m shares (3.9%) on 25 Jan 2019. Interestingly, Dato’ Sri Robin Tan (eldest son of Tan Sri Vincent Tan) has emerged as a substantial shareholder with 247m shares (8.3%) on 21 Sep 2018, and has subsequently upped his stake to 271m shares (9.1%) at present.

Starting with a clean slate. The group has been divesting non-core assets to realign its business focus on Trusted ID, which involved kitchen-sinking impairments and write-offs of c.RM316m over FY17 and FY18. The exercise, which is almost concluded, has helped stem the bleeding from the non-core assets and brought the group back into profitability in the past three quarters. We believe the few remaining non-core assets, which are still dragging earnings with aggregate losses of >RM40m annually, could be disposed of this year. Based on Trusted ID’s earnings per se, the stock is only trading at 7x FY19E PER, even before factoring in the IC contract (refer overleaf for details).

Overhang to be over soon. The continuous share disposals (likely due to non-fundamental-related reasons) by a GLC shareholder have probably been the impediment to IRIS’ share price improvements since 2018. Thankfully, the shareholder has ceased to be a major shareholder on 21 Feb 2019 (from c.21.3% stake in early-2018). Currently, we believe the shareholder has only 3-4% stake left in the company, signifying that the share overhang will likely blow over soon.

Project FY19-20E CNPs at RM24.7-48.9m. The sturdy growth expected in FY20 is largely fuelled by the discontinuation of non-core businesses and 10% top-line growth in Trusted ID (vs.10-15% guided).

Trading Buy with a FV of RM0.200, based on FY20E PER of 12.0x, a discount to its peers’ 18x given its ACE market status and smaller earnings base. Although IRIS’ market capitalisation is c.40% smaller than that of DSONIC’s, its superior earnings growth warrants a slightly smaller discount rate of 30%. Post-disposals of non-core assets, IRIS’ earnings are expected to bounce back with a vengeance in FY20 (+98%). In addition, the stock only trades at FY20E PER of 8.5x, which limits its share price downside, while providing investors with opportunities to buy into its potential to win the IC contract.

Source: Kenanga Research - 25 Mar 2019