Datasonic  has  proposed  to  acquire  a  smart  card  manufacturing  plant from  Formosa  Prosonic  Industries  (FOR  MK;  NR)  for  MYR21.9m.  This will  boost its operational  margins in the long run by increasing its inhouse  manufacturing  and  assembly  capacity.  That  said,  we  are  now downgrading  our  call  to NEUTRAL (from Buy),  with our FV unchanged at MYR4.08, given the limited upside. The share price has surged >200% since we initiated coverage in Nov 2013.

• The salient details.  The proposed acquisition  will  involve 100% equity interest  in  Asia  Pacific  Card  &  System  SB  (ACPS),  together  with  its wholly-owned  subsidiary,  Constant  Ahead  SB.  ACPS,  which manufactures  as well as assembles  electrical integrated circuit cards, is currently one of Datasonic’s main outsource partners in the procurement and  assembly  of  MyKad.  The  acquisition,  in  our  view,  is  expected  to boost  Datasonic’s  operational  margins in the long run by increasing its in-house  manufacturing  and  assembly  capacity.  In  addition,  Datasonic would also be able to tap into ACPS’ technological knowhow, and supply chain and processes in the smart  card business.  All in, we are positive on the acquisition.  Meanwhile, funding  of  the total cash consideration of MYR21.9m  should  not  be  an  issue  as  we  are  forecasting  an  annual operating cash flow of MYR100-120m for Datasonic.
• Forecasts retained.  We make no changes to our forecasts for now as we had earlier incorporated margins improvement in its operations owing to  higher  economies  of  scale.  Our  FY14F  and  FY15F  estimates  are premised  on our assumption that the group would soon secure another order of 10m copies of MyKad worth MYR180-200m.
• Downgrade on limited upside for now.  Since we initiated coverage in mid-Nov 2013, Datasonic’s share price has surged >200% from a low of MYR1.29  (ex-bonus).  Given  the  limited  upside  to  our  current  FV  of MYR4.08,  which  is  based  on  a  25.0x  CY15  P/E,  we  are  taking  the opportunity to downgrade our call to NEUTRAL.  Still, we do not discount the possibility of revisiting our forecasts should m anagement secure new initiatives outside the existing  MyKad  and passport space. In particular, we are  looking  forward to  more developments on the electronic medical and  health  record  systems  front,  as  well  as  the  intelligent  transport information system that the group is currently developing.

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