Iris Corp’s property division to become more prominent

Iris Corp Bhd (Dec 16, 21.5 sen)

Maintain sell with a target price (TP) of 16 sen: It was reported that Datasonic Group Bhd had accepted the letter of award from the home ministry to supply Malaysian passport chips.

This will last for a period of five years or 12.5 million chips from Dec 1, 2016, to Nov 30, 2021. The contract sum is RM318.8 million.

The announcement is a huge blow to Iris Corp Bhd. The Malaysian passport project is part of the group’s bread and butter, contributing to about 15% of its revenue in its trusted identification segment.

Its current contract to supply Malaysian passport chips ends in April 2016 — leaving financial year 2016 (FY16) earnings largely intact.

Instead, after adjusting our assumptions for FY17 and FY18, we decrease our earnings estimates by approximately 16% to RM38.6 million and RM42 million respectively.

Its property development division will play a prominent role in its future plans. Undoubtedly, contributions from this segment could potentially fill the gap left by the loss of its passport project.

However, despite its past success in implementing the Rimbunan Kaseh (RK) and Sentuhan Kasih (SK) projects, the group remains relatively new in the property development space.

Hence, we do not discount the possibility of teething issues in the initial stages. Additionally, failure to turn around its RK and SK divisions will place additional pressures on the group’s bottom line.

In line with our earnings downgrade, we decrease our TP for Iris to 16 sen per share (from 19 sen per share), based on a price-earnings ratio of 12 times and lower calendar year 2016 earnings per share of 1.3 sen.

We maintain our “sell” call on the stock. — TA Securities Holdings Bhd, Dec 16

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This article first appeared in The Edge Financial Daily, on Dec 17, 2015. Subscribe to The Edge Financial Daily here.