This article first appeared in The Edge Financial Daily on March 12, 2020

Datasonic Group Bhd
(March 11, 99.5 sen)
Maintain buy with an unchanged target price (TP) of RM1.96: We believe the steep about 40% share price correction is overdone as Datasonic Group Bhd’s strong business fundamentals are backed by an outstanding order book of RM611 million and sustainable earnings. Tenders for the Foreign Visa System (VLN) and National Integrated Immigration System (NIIS) are currently ongoing and could potentially be rolled out in April or May. Datasonic is eyeing both and is among the front runners, given its track record and experience in the existing immigration system.

We have seen the share price correct about 40% since the local political environment upheavals and sharp market correction, which saw some short-selling activities. The risk-off sentiment is profound following a wider spread of Covid-19, oil price slump and domestic political changes.

Recall that its core earnings reported for the third quarter ended Dec 31, 2019 were its best in recent history (+71.5% year-on-year [y-o-y]; +46.9% quarter-on-quarter [q-o-q]). This was attributed to a stronger revenue (+32% y-o-y; +18% q-o-q) that stemmed from stronger MyKad orders and higher revenue from other projects such as security and surveillance, maintenance as well as Europay, Mastercard and Visa-related solutions. We expect another strong quarter ahead on profit recognition from auto-gate maintenance-related works.

Tenders for the NIIS — potentially worth about RM1.5 billion — were closed on March 4 and Datasonic was among the fewer than 15 bidders. The home ministry has also invited tenders for the VLN — with a potential contract value of RM1 billion to RM1.5 billion — which will be closed on April 16. We believe Datasonic is among the front runners for the bids as it has been a reliable integrated service provider for the home ministry in national security-related solutions since 1998.

We maintain our “buy” call, given Datasonic’s sustainable strong results, potential job wins in the near term as well as undisputed track record in securing contracts and delivering outstanding service. Key downside risks include fluctuations in orders and contract discontinuation. Note that a failure in its contract bids may see its TP revert to RM1.21. — RHB Research Institute, March 11