Review

• Despite reporting narrowing losses, IRIS missed expectations with core net losses of RM27.0mn in the 9MFY17.

• QoQ. As anticipated, trusted ID revenues (+48.5% QoQ) jumped, as it began works on its Senegal eID project. It has delivered 2.2mn out of the 5.0mn new multi-application identity biometric cards required to be supplied by March 2017. Nonetheless, contributions were held back by continued losses at the property development & construction and food & agro subdivision. Higher taxes of RM5.1mn were also recorded during the quarter.

• YoY. Revenue fell 18.5% YoY. Property development & construction revenues declined 52.6% YoY as it derived lower sales from Rimbunan Kaseh and Sentuhan Kasih programmes. Losses within its property development & construction and food & agro technology sub-division increased to RM9.3mn (9MFY15: -RM5.1mn) and RM20.1mn (9MFY15: - RM11.4mn). That said, the situation should not deteriorate further as it has stopped accepting new management contracts. In a bid to re-shift its focus, the group is also considering divesting its non-core assets.

Impact

• Given intentions to reshift its focus to core businesses, we completely remove contributions from its much delayed Gerehu Heights project from our forecasts. We also impute higher than expected losses within its property development & construction division. We lower our FY17/FY18/ FY19 estimates by 90.3%/45.1%/50.9% to –RM27.5mn/RM20.3mn/ RM24.4mn.

Outlook

• We expect revenues in the coming quarter will be driven by its trusted ID division. Specifically, its 5 year contract worth EUR76.2mn with the Senegalese government to produce and supply 10mn new multi-application identity biometric cards. With the contract being front loaded, 5mn cards are required to be supplied by March 2017. We expect a balance of up to 2.8mn cards will be supplied in the coming quarter.

• Re-shifting its focus back onto its core business, the group is planning the divestment of non-core assets. We are positive on this move, as it helps free up capital and allows the group to focus attention on its profitable trusted ID business. In the past, it had disposed its waste to energy incinerator plant in Phuket and stakes in Versatile Creative Berhad.

Valuation

• Given predicted losses in FY17, we roll forward our valuations to CY18. We lower our TP for IRIS to RM0.135/share – based on a PE of 14x and CY18 EPS of 1.0sen. We maintain our HOLD recommendation on the stock. While we are positive on intentions to restructure the company, we remain wary of concerns surrounding its loss making entities. Potential rerating catalysts are disposal of loss making assets and securing new trusted ID contracts.

Source: TA Research - 23 Feb 2017