Proposed acquisition of Formosa to boost Datasonic

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KUCHING: Datasonic Group Bhd’s (Datasonic) proposal to acquire a smart card manufacturing plant from Formosa Prosonic Industries Bhd (Formosa) for RM21.9 million is expected to boost its operational margins in the long run.

In a statement to Bursa Malaysia on Wednesday, Datasonic had announced that it had entered into a share sale agreement with Formosa for the acquisition of 24.86 millon shares, representing 99.45 per cent of the equity interest in Asia Pacific Card and System Sdn Bhd (APCS).

According to analyst Kong Heng Siong of RHB Research Institute Sdn Bhd (RHB Research), this will boost its operational margins in the long run by increasing its in-house manufacturing and assembly capacity.

In addition, the analyst highlighted that Datasonic would also be able to tap into APCS’ 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 RM21.9 million should not be an issue as we are forecasting an annual operating cash flow of RM100 million to RM120 million for Datasonic,” Kong projected.

That said, the analyst explained that they made no changes to their forecasts for now as they had earlier incorporated margins improvement in the group’s operations owing to higher economies of scale.

RHB Research’s financial year 2014 forecast (FY14F) and FY15F estimates are premised on its assumption that the group would soon secure another order of 10 million copies of MyKad worth RM180 million to RM200 million.

Since the research house initiated coverage in mid-November 2013, it noted that Datasonic’s share price has surged to over 200 per cent from a low of RM1.29 per share (ex-bonus).

Given the limited upside to Datasonic’s current fair value of RM4.08 per share, which is based on a 25-fold current year 2015 (CY15) price earnings (P/E), RHB Research took the opportunity to downgrade its call to ‘neutral’.

“Still, we do not discount the possibility of revisiting our forecasts should management 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,” the analyst concluded.