Datasonic is poised to be listed on the Bursa Main Market with a market cap of RM180m on 3rdSeptember. The company is an ICT solutions provider primarily in the secure ID and smart card personalization business. We like Datasonic for its strong outstanding order book of RM450m, which could last them for approx three to five years in the future. Based on 8x FY13 PE, we derive a FV of RM2.29 for Datasonic, implying a 15% upside to its IPO price. We recommend investors to SUBSCRIBE to the stock.
Background. Established in 1980, Datasonic is an ICT solutions provider primarily in the secure ID and smart card personalization business. Other services provided include the customization of software and hardware solutions, project management, consultancy, R&D and technical consultancy services. The company commands a revenue share of 17% in the Malaysian smart card solutions market.
Smart card market still growing. The smart card market in Malaysia has an estimated value of RM482.6m and is expected to expand to RM576.3m by 2016 (5-year CAGR of 3.7%). Moving forward, growth in the local smart card industry will be driven by: (i) demand from existing applications, (ii) adoption of smart cards in new markets, (iii) technological improvements and innovations and (iv) a lack of direct substitutes in the market.
Solid financials. Over the past three years, Datasonic’s revenue/core PAT growth has been phenomenal, with a CAGR of 42%/23% respectively. The breakthrough came in FY11 when the company secured new projects awarded by Malaysia’s Immigration Department and NRD. This explains the strong outstanding order book of RM450m, which could very well keep them busy for the next 3-5 years. Datasonic also has a robust balance sheet with low gearing and its future operating cash flows is expected to be strong as well.
Future plans. Over the next three years, Datasonic intends to tap into: (i) the healthcare sector, by introducing the Total Total Hospital Information System (HIS), (ii) the education sector, by introducing the multi-purpose student ID card system, as well as (iii) the regional markets, with its multi-application National ID and border control systems.
Assumptions made to our forecasts. Assuming no replenishment in orders, we spread its current outstanding order book of RM450m across four years and forecast Datasonic’s revenue to sharply rise this year (+44% y-o-y), followed by moderate growth in FY13 and FY14 (+4%-5% y-o-y). We also expect gross and net profit margins to normalise at 50% and 20% respectively in the short term, erring on the conservative side (we saw a spike in its 2MFY12 PAT margin by 210 bps y-o-y to 33%). FY12-FY14’s PAT is expected to grow in tandem with revenue.
COMPANY BACKGROUND
Established in 1980, Datasonic is an ICT solutions provider primarily in the secure identification (ID) and smart card personalization business. The company is the only ICT vendor to be involved with three major smart card programmes in Malaysia: the Government Multi-Purpose ID Card (GMPC), Payment Multi-Purpose Card (PMPC), and the Europay MasterCard and Visa (EMV) chip-based credit card. It is also an exclusive distributor of Datacard Central Issuance Systems and Solutions in the country. According to independent market research firm Protégé Associate, Datasonic commands a revenue share of 17% in the Malaysian smart card solutions market.
Established relationships with foreign players. Over the years, Datasonic has established close ties with foreign smart card companies such as Datacard Corp, Digital Identification Solutions AG, IXLA SA and Trub AG. It is now able to provide a comprehensive range of products and services in the secure ID and card personalisation solutions market.
Datasonic’s principal business activities are categorised into three core segments:
i) Sales of products and provision of services:
a) Services provided for customers with service contract
- Service and replacement of machinery and spare parts for customers with a signed contract or agreement.
b) Services provided for customers with non-service contract
- Ad hoc servicing and spare parts replacement based on purchase orders for customers without contracts or agreements.
c) Sales of consumables
- Selling ribbons, cleaners and products for card lamination.
d) Sales of cards
- Selling contact and contactless smart cards for financial institutions, major corporations and the Government.
e) Sales of equipment
- Selling centralized issuance systems and decentralized desktop printers.
ii) Smart card printer software development
- Designing, installing, integrating, maintaining and providing technical support for smart card systems.
iii) Smart card personalization services
- Printing, embossing, indent printing, laminating, topcoat application and envelop insertion using Datacard Card Issuance Systems to produce ATM, debit/credit cards more efficiently.
Major shareholders boost business. Post-IPO, Dibena Enterprise SB (DESB) and Dato’ Abu Hanifah bin Noordin will be Datasonic’s major shareholders with stakes of 53.1% and 15.5% respectively. We understand DESB is a key member of GMPC Corporation SB, a consortium of five companies for the MyKad project. Furthermore, Dato’ Abu is also the Executive Chairman and CEO of DESB as well as Chairman of GMPC Corp. Historically, Datasonic generates 50%-80% of its revenue via DESB from the Government. Currently, it has a strong order book of RM450m, which could very well keep the company busy for the next three to five years.
Source: OSK
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