THAT investors were disappointed when the government shelved the fuel subsidy rationalisation scheme is clearly reflected in the sharp fall in Datasonic Group Bhd’s share price since the second half of last year.

From around RM2 last July, the company — deemed a strong contender for the fuel subsidy job — saw its stock plunge to RM1.09 last Wednesday, giving it a market capitalisation of RM1.47 billion.

The information and communications technology solutions provider was a big hit among fund managers early last year. It reached an all-time high of RM2.40 last April after the renewal of its exclusive contracts to supply the National Registration Department (NRD) with new polycarbonate MyKad and the Immigration Department with polycarbonate datapages for passports.

These contracts apart, Datasonic also attracted the attention of investors after it was said to have been shortlisted for the fuel subsidy project, which was to be based on the MyKad system.

However, there was soon much debate on whether the supposedly lucrative project should be awarded in an open tender. Then, as global oil prices crumbled in the second half of 2014, the government put the fuel subsidy scheme on hold. And as the prospect of the project being awarded dimmed, Datasonic’s share price took a tumble.

The company would have generated a higher revenue for this year had the fuel subsidy job been awarded to it, group deputy managing director Chew Ben Ben tells The Edge. “The project was supposed to have been implemented [by Datasonic] at the end of last year, but it was later turned into an open tender [by the government]. After that, oil prices slid and the government postponed the project, affecting our projected profit.”

He cautions that earnings for the next few quarters may not be “fantastic”, depending on how many MyKad purchases Datasonic receives from the NRD. Typically, the order per quarter is for 500,000 to 1.5 million pieces.

Chew says close to 75% of the group’s current revenue is from the supply of MyKad and consumables like ribbons and MyKad printers supplied to the NRD offices. The supply of passport datapages makes up the remaining 25%.

Last April, Datasonic signed a RM220.2 million contract with the NRD for the supply of 10 million raw MyKad and consumables. The contract ends on May 30, 2016. Its deal with the Immigration Department will see it supply 10 million passport datapages for RM284.7 million until Feb 28, 2018.

Acknowledging that Datasonic has been too dependent on its MyKad and passport datapage contracts, Chew says, “We have established ourselves in the MyKad and passport datapage areas, so I think we now have to diversify into other businesses and expand our earnings base.”

Nevertheless, government projects have their perks, he observes, highlighting the fact that there are no worries about bad debts and the contracts are usually renewed once a company has “proved itself” in terms of service and quality.

When asked about new jobs, Chew cautiously replies that some potential ICT and security-related government projects are in the works. “It is too early to disclose them now, but you can expect us to secure something by the third quarter of this year,” he says, without providing any details.

It is understood that Datasonic will likely have its passport datapage contract with the Immigration Department renewed. Currently, says Chew, some 5.8 million passport datapages are outstanding in the company’s order book. The order rate has been about 2.5 million units per year, he adds.

Note that Datasonic’s revenue and net profit have been declining on a year-on-year basis over the last two quarters. The group also changed its financial year-end to March from December a year ago, resulting in a 15-month year for FY2014 ended March 31.

In its third quarter ended Dec 31, 2014, net profit shrank to RM15.6 million from RM22.8 million in its fourth quarter ended Dec 31, 2013. Revenue in 3QFY2015 declined to RM60.4 million from RM72.6 million previously.

Chew says the decline in 3QFY2015 was due to a drop in the order for MyKad, especially the consumables. The NRD had ordered a more-than-expected number of consumables in the previous year — 10 million instead of 6 million — resulting in a smaller order in the recent quarters.

According to Chew, in Datasonic’s current contract with the NRD, the MyKad is being sold at a lower price of RM17.50 each instead of the RM18 charged in the previous contract. This also contributed to a lower revenue in 3QFY2015 compared with a year ago.

It is worth noting that the margin for the MyKad and consumables is lucrative, coming in at 35% to 40%. For the passport datapage, it is only 15% because of the high initial capital investment.

However, Chew says subsequent contract renewals, if any, will enable the company to post higher margins because the machinery is already in place and can be used for the next 10 to 15 years.

RHB Research, the only research house covering Datasonic (fundamental: 2.2; valuation: 0.3), has maintained its “buy” call on the counter but trimmed its target price from RM2.10 to RM1.66 on March 2, after removing a potential earnings contribution from the shelved fuel subsidy project.

“The company will need to look for other sources of income to increase its earnings,” says its analyst.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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