• Datasonic’s 2QFY18 revenue grew 23% qoq but fell 4% yoy on lower delivery of passport chips and booklets although this was more than offset by lower opex resulting in 2QFY18 core earnings surging 34% yoy and 30% qoq to RM20m.

• The strong performance shored up 1HFY18 core earnings which only fell 2% to RM35m and was 38% of our estimates.

• We make no changes to earnings as we expect a stronger 2H18 ahead of more deliveries of smart cards, passports and other deliverables. Order book currently stands at RM795.4m.

• A second interim DPS of 1.0 sen (YTD: 2.0 sen) was declared.

• Maintain BUY with an RM1.45 DCF-derived TP which implies a FY18E PE of 21x before easing to 20x in FY19E. We believe its healthy order book provides visibility for the next 2 years.

Higher yoy earnings despite lower revenue

Datasonic’s 2Q18 revenue grew 22.8% qoq but fell 3.8% yoy on lower delivery of passport chips and booklets (2Q18: RM56.91m, 2Q17: RM61.49m). Despite lower yoy revenue growth, 2Q18 core earnings surged 33.6% yoy and 29.8% qoq as opex fell amidst good cost containment.

Stronger 2H18 ahead

The group’s 1HFY18 core earnings fell 1.8% to RM35.2m and was only 37.7% of our expectations. The weak earnings were due to revenue declining after the new e-passport delivery deferred. It expects to deliver at least 200k units per month as per contract. This augurs well for its FY18 earnings outlook.

Notable highlights from analyst briefing

Key points from the analyst briefing were: i) The maintenance role for c.120 auto gate system for Immigration Department has been integrated in Sep 2017; ii) It has deployed the hub-printing solutions for National Registration Department across all states in Sep 2017, improving distribution procedures for MyKad; iii) The contract to supply passport data pages ends on 31 Jan 2018 but management expects a renewal given its proven track record.

Dividend declared

A second interim DPS of 1.0 sen (YTD: 2.0 sen) was declared. Our full year forecast DPS of 4.5 sen implies a dividend yield of 4.1%.

Maintain BUY with TP of RM1.45

Maintain BUY with a DCF-derived TP of RM1.45 (WACC: 5.1%, Terminal growth: 0.5%) which implies FY18E PE of 21x and 20x in FY19E. We believe this is justified by its RM795.4m order book provides visibility up to FY23E.

Source: BIMB Securities Research - 27 Nov 2017