• DSONIC business was significantly hit by the closure of international borders on weak passport demand in FY21. With the reopening of international borders, we expect earnings to grow at a CAGR of 141% over FY21 – 24F on strong contribution from the passport segment and continuous delivery of MyKad.
• We believe DSONIC deserves a re-rating in valuation as earnings predicted to soar in the near-term driven by pent-up demand for new passports. Besides, we remain confident that DSONIC is a frontrunner for the new generation of Mykad contract.
• DSONIC’s BCPLC status received by MITI upon completion of private placement in Apr 2021 would strengthen its business competitiveness in participating in more government projects.
• We resume our coverage on DSONIC with BUY recommendation. Our TP of RM1.05 is pegged at 37x PER on FY23F EPS of 2.8 sen.

Strong earnings recovery expected ahead

Closure of international borders had significantly hit DSONIC’s earnings due to weak passport demand which saw its FY21’s earnings dropped 89% to RM7m from RM63m in FY20. However, with the reopening of international borders which allow Umrah travel, the commencement of Malaysia-Singapore Vaccinated Travel Lane (VTL), and more travel bubbles adopted worldwide, we expect strong earnings recovery for DSONIC in the near-term primarily driven by pent-up demand for passports. We forecast DSONIC’s core earnings to grow at a CAGR of 141% over FY21 – 24F.

Deserves re-rating with higher PE valuation

The stock is currently trading at a lowly 19x 12-month forward PE, approaching -1SD PE of 14x, even after starting to report earnings recovery in 2QFY22. Management also shared a brighter outlook guidance in its 2QFY22 which we believe is positive. We argue for a higher valuation to reflect earnings growth potential from strong demand for passports. Besides, we are confident that DSONIC is the front runner for new generation MyKad contract given its proven track record in delivering high quality product with great security features since 2011.

Strengthen business competitiveness through BCPLC status

Upon completion of its private share placement in Apr 2021, DSONIC is granted with Bumiputera Controlled Public Listed Company (BCPLC) status by Ministry of International and Trade Industry (MITI) which now allows the company to participate in more government projects. DSONIC had successfully raised proceeds of RM126m where 80% or RM101m of the proceeds will be used to finance DSONIC existing and future projects. There are several tender projects that DSONIC has entered and waiting for awards which are 1) i-Kad project (foreign worker card), 2) National Digital ID (NDI), and 3) Electronic Medical Record (EMR).

BUY call with TP of RM1.05

We resume coverage on DSONIC with BUY recommendation at a TP of RM1.05. This values the stock at 37x PER on FY23F EPS of 2.8 sen. Our forecast implies a strong earnings recovery in tandem with pent-up demand for passports following the reopening of international borders coupled with DSONIC solid outstanding order book worth RM420m to provide earnings visibility up to FY25F.

Source: BIMB Securities Research - 3 Jan 2022