Datasonic  yesterday  proposed  to  acquire  30%  of  Fuelsubs  House  SB (FHSB)  for  MYR10m,  subject  to  the  latter  securing  the  mandate  to manage  the  national  fuel  subsidy  program.  This  confirms  previous media  speculation  and  comes  as  a  positive  surprise  to  us.  Upgrade  to BUY (from Neutral), FV raised to MYR2.50 (from MYR2.04)  as we factor in potential earnings contributions from this contract come FY16F.

Details from exchange filing. Out of the MYR10m total, MYR7m could be injected into FHSB as working capital while the remainder is expected to  be  paid  to  the  existing  shareholders.  The  existing  shareholders  are Habibul  Rahman  bin Kadir Shah, Dato’ Razali Merican bin  Naina,  Zaid bin  Kadershah  and  a  private  company,  HKS  Primatrix  SB.  Collectively, they will own 70% of FHSB upon completion of the exercise.  

Positive surprise. This comes as a positive surprise to us and confirms previous media reports that the group was eyeing for the said job. In our view,  Datasonic  would  be  roped  in  as  the  technology  partner,  given  its proven  track  record  in  providing  MyKad  and  photopages  of  national passports to the Government. We believe this acquisition will likely lead to  MyKad  being  designated  as  the  official  card  to  help  facilitate  the execution  of  the  fuel  subsidy  program.  This  would  be  convenient,  as Datasonic developed the MyKad operating system on its own.

Earnings accretion. If this program can save the Government as much as MYR9.8bn per annum, as reported by the media, we expect FHSB to be  paid  at  least  2-3% of  the potential savings.  Pegging  a net  margin of 40% to potential annual revenues of MYR200m-MYR300m, we estimate that  the  fuel  subsidy  program,  if  it  materializes,  could  bring  in  an additional  MYR24m-MYR36m  to Datasonic’s bottomline  on  a  full-year basis. With  that,  we  upgrade our  FY16F earnings estimate by  22.9% to MYR135m.  Our  FY15F  forecasts  are  left  unchanged  for  now,  pending official  award  of  the  contract,  which  will  give  better  clarity  on  the implementation timeline.  

Upgrade  to  BUY.  Overall,  we  are  positive  on  the  announcement  and upgrade  our  call  to  BUY.  Our  FV  now  stands  at  MYR2.50,  at  an unchanged  FY16F  P/E  of  25.0x,  following  our  earnings  revision.  As  we believe  the  announcement  will  fuel  positive  sentiment,  we  foresee  a potential re-rating in its share price over the near term.

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Source: RHB