Maybank Kim Eng put out an impressive 14-page report on DISA in April 2017  (click here) but there was no follow up report.  Now comes a 16-page initiation report by KGI Securities, excerpts of which are below. (In between, in Jan 2018, we wrote two articles, one of which is: )



Analyst: Marc Tan

Valuation
We initiate coverage on DISA with a BUY recommendation and a target price of S$0.02 which represents an upside of 100%.

DISA

Share price: 
0.9 c

Target: 
2.0 c

Our target price is based on a DCF valuation, implying a 2021F P/E of 23.9x.

Earnings: Valuation of DISA was based on earnings improvement from (-0.26) cents in 2017 to 0.10 cents by 2021F, driven by the ramp-up its anti-theft technology in the United States.



Margins: We expect gross margins to increase by 45 ppt from 2017 to ~80% by 2021F, while operating and net margins should turn positive by 2021F at 32% and 24% respectively.

EddieChng2017Eddie Chng, CEO, speaking with shareholders after DISA's FY2017 AGM. NextInsight photo. In aggregate, these will be driven by a diminished increase in staff costs and an improving operating leverage.

SKUs and Barcodes: We estimated the total potential SKUs of 3 large US retailers (including Walmart) endorsing DISA’s anti-theft technology, based on the average SKUs available at a large retail store in the United States. Our assumptions include a minimum of 100 items per SKU annually, which translates into 100 barcodes per SKU per annum.

"Our estimates are based on the main assumption that the company is now at an inflection point and DISA will become the market leader if it can get 2 other large US retailers other than Walmart, to endorse their technology."

-- Marc Tan, analyst
KGI Securities

From these assumptions, we estimated a combined minimum of 771 million SKUs per annum and a minimum of 77 billion barcodes which could be available to DISA.

However, since food products are unlikely to use the technology due to costs and practicality reasons, we believe that DISA can only capture a portion of the combined SKUs or barcodes.

From DISA’s 2017 revenues, we estimated that the company sold 1.8 million barcodes to Walmart’s suppliers and if we assume a similar penetration rate, this would translate into 2.7 million barcodes from the suppliers in 2018F.

By 2019F, we expect higher supplier penetration rates due to the increased number of retailers endorsing DISA’s technology, resulting in sales of 115 million barcodes.

Industry Leader: In summary, our estimates are based on the main assumption that the company is now at an inflection point and DISA will become the market leader if it can get 2 other large US retailers other than Walmart, to endorse their technology.

In such a scenario, we believe that DISA will enjoy exponential growth rates in barcode sales, which is why we forecast the number of barcodes sold to increase by a CAGR of 203% to 462 million by 2021F from an implied 1.8 million barcodes sold in 2017.

 
Full report here


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