• Datasonic’s 1QFY18 core earnings fell 17.4% qoq and 25.9% yoy due to delays in Malaysian passports delivery.

• Despite the weak 1QFY18 earnings performance, we retain our forecasts as we expect contribution from the supply of Malaysian passports will be back-end loaded (2HFY18).

• A first interim DPS of 1.0 sen was declared.

• Maintain BUY with a DCF-derived TP of RM1.45. We like the stock for its huge outstanding order book worth RM828.7m (as at 1Q18), providing earnings visibility of up to FY23E.

A strong respite ahead

Datasonic’s 1QFY18 core earnings declined 17.4% qoq and 25.9% yoy in tandem with the weak revenue 35.1% qoq and 21.0% yoy following the delay in passports delivery for 6 months. The delay is due to changes in the passport security features as requested by the Ministry of Home Affairs (KDN). Overall, its 1QFY18 core earnings lagged our expectations at only 16.2% of FY18E forecast.

No change to forecast

Despite the weak 1QFY18 earnings performance, our forecasts remain unchanged as we expect contribution from the supply of Malaysian passport would resume in 2HFY18 as per management’s guidance.

Other key highlights

Other key highlights from the analyst briefing session were: i) the construction of the Smart ID manufacturing plant which would produce 500k e-passport and 600k e-ID Smart Card per month is underway; ii) management identified the Hospital Information System (HIS) as its next potential earnings driver; in Sep 2017, HIS would undergo pilot projects with private hospitals; iii) delay in the commencement of the Tanzania border control project to Oct 2017 (previously was 1H 2017); the contract value of the project is US$192m over a 10-year concession period.

Dividend declared

A first interim DPS of 1.0 sen was declared. Our full year DPS of 4.5 sen. Our forecast DPS implies a dividend yield of 4.1%.

Maintain BUY with TP of RM1.45

We maintain our BUY recommendation with DCF-derived TP of RM1.45 (WACC: 5.1%, Terminal growth: 0.5%). This implies a FY18E PE of 21x before easing to 20x in FY19E which is fair considering a huge outstanding order book worth at RM828.7m (as at 1Q18), provides earnings visibility up to FY23E.

Source: BIMB Securities Research - 28 Aug 2017