• Following the recent Datasonic (DSONIC) analyst briefing, we remain bullish on its near-term outlook, fueled by robust demand from the passport and MyKad registration. Management guided a strong 2QFY23 earnings in tandem with higher delivery of passports and MyKad to the government with 1HFY23 revenue to surpass the full year of FY22.

• While we are maintaining our revenue assumption on robust demand for passports and MyKad, we slash our FY23-FY25 earnings forecast between 23%-31% on higher D&A and effective tax rate in tandem with the management guidance.

• We maintain our BUY call on DSONIC with a lower TP of RM0.62 (RM1.11), pegged at 30x PER to its FY23F EPS of 2.1 sen. At current share price, the stock offers an attractive return to investors given its strong earnings recovery story coupled with solid outstanding orderbook worth RM419mn to provide earnings visibility through FY25F.

1HFY23 Revenue to Surpass FY22

We remain bullish on Datasonic (DSONIC) near-term business prospects following the recent analyst briefing as the management guided a stronger revenue growth in 2QFY23 that would primarily be driven by robust demand from the passport and MyKad registration. Moreover, management is confident its 1HFY23’s revenue may surpass the full year of FY22.

Stronger Passport Delivery Expected Ahead

In 1QFY23, passport issuance reached 13k units in a single day, setting a new record for the highest delivery in the Immigration Department history since 2015 (it was the first time when chip was embedded into the polycarbonate datapage). The normal annual demand for passports (pre-COVID) is 2.2mn – 2.5mn units a day (approximately 6k-6.8k issuance per day). This resulted in higher passport polycarbonate data pages in 1QFY23, up 15% over FY22 to 681k from 594k units (Chart 1). For 2QFY23, management expects to deliver 824k – 850k units of passports to the government. Based on our assumptions, this equates to RM55mn – RM57mn in revenue.

Visible MyKad contribution in 2QFY23

MyKad consumables registered a 686k units of delivery to the government whilst no delivery for the raw cards and chips (Chart 2). However, management confirmed of 500k units (valued around RM8mn) and 1.5mn to 1.6mn units (valued at RM6mn – RM7mn) delivery for the raw cards & chips and consumables in 2QFY23.

The Next Generation of MyKad - Likely to be in 2HFY24

Management guided the high possibility for the new contract of the next generation of MyKad (new design and latest security features) to be awarded after the end of MyKad contract extension in Aug 2022 will be reflected in its 2HFY24. As for now, DSONIC is a front-runner for the said contract given its proven track record within the national security documents space. Management indicated that the new MyKad contract will be a 5-year tenure and involves the supply of 15mn units of new generation MyKad. Note that the printing system will be installed nationwide at UTC, which translates into RM320mn – RM350mn orderbook.

Strong Revenue Offset by Higher D&A and Effective Tax Rate

According to the management, the higher D&A was due to an increase in utilisation rate for its printing system in tandem with solid demand for both passport and MyKad products. On the other hand, the increase in effective tax rate in 1QFY23 was due to the lapse of MSC Malaysia Status Service Tax Incentives for some of the passport and MyKad products in May 2022. Moving forwards, the effective tax rate will return to 24% from an average of 10% p.a. However, DSONIC is currently negotiating with the Malaysia Digital Economy Corporation (MDEC) for tax incentives in its upcoming innovation products. As for now, we anticipate FY23 onwards to register a higher D&A and effective tax rate and affecting the bottom line.

Earnings Revision

While maintaining our revenue forecast on strong passports and MyKad delivery to the government, we revisit our earnings estimate. Thus, we slash FY23-FY25 earnings assumption by 23%-31% (Table 1) to reflect on higher D&A and effective tax rate in tandem with the management guidance.

Reiterate BUY at Lower TP of RM0.62 (from RM1.11)

We maintain our BUY call on DSONIC with a lower TP of RM0.62 (from RM1.11), to reflect our earnings revision. Our TP was is derived based on 30x PER (from 37x PER) pegged DSONIC’s FY23F EPS of 2.1 sen. At the current share price, the stock offers an attractive return to investors given its strong earnings recovery story underpinned by strong demand for passports and MyKad nationwide amid the reopening of international borders coupled with DSONIC solid outstanding orderbook worth RM419mn (Table 2) that will provide earnings visibility up to FY25F.

Source: BIMB Securities Research - 5 Sept 2022