We maintain our BUY call on ITMAX System Bhd (ITMAX, stock code 5309) with a higher TP of RM2.06 (+9.6% increase from RM1.88) based on 26x PER (average PER of its regional peers at similar market cap) over FY24 EPS. The increase in TP reflects the recent contract win in Iskandar Puteri City Council through its 65%-owned subsidiary, which increased its unbilled order book by RM111.24m to RM823.8m. We raise our FY23/24/25 net earnings forecast by 5%/9.7%/10.1%, supported by (i) further penetration with various networked solutions in Johor; (ii) margin expansion attributed to a more favourable revenue mixture moving forward, buoyed by increased contributions from its higher-margin recurring business.

In reference to our previous report dated 20 Sep 2023, regarding ITMAX’s potential contract win in Johor, ITMAX’s 65%-owned subsidiary Southmax SB had on 22 Sept 2023 officially accepted the Letter of Award (LOA) awarded by Iskandar Puteri City Council (MBIP) in relation to the provision of video surveillance and smart traffic light system services, which includes a closed circuit camera system with artificial intelligence features as well as a smart traffic light system on a service subscription basis. This LOA spans 15 years from 26 Sept 2023 to 25 Sept 2038, with a total value of RM111.24m.

This contract win has further boosted ITMAX’s unbilled orderbook to a record high of RM823.8m penetrating Iskandar Puteri City Council (MBIP) with its networked solutions – smart traffic lights, on top of Johor Bahru City Council (MBJB)’s 500 CCTVs contract. ITMAX is replicating its smart city solution services in MBIP's traffic lights. To recap, ITMAX currently manages all 600 traffic junctions in Kuala Lumpur, and from our perspective, there is potential for this to be replicated in Johor State. Our forecast projected annual revenue and net profit contribution of RM7.4m and RM2.8m respectively for the LOA period, with margins expected to be similar to the contract awarded by MBJB.

The contract win has further strengthened ITMAX’s recurring revenue streams which offers better margin and earnings visibility as compared to the supply, installation and maintenance services segment. We anticipate a more favourable revenue mix for ITMAX moving forward, via the ability to expand its recurring income base, ultimately leading to margin expansion. We believe ITMAX's outlook remains highly resilient, driven by its potential to penetrate more Johor city councils out of the total 16, by offering other potential solutions i.e. networked lighting and smart parking, in the future.

Source: Rakuten Research - 25 Sept 2023

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