We are initiating coverage on DSON with a BUY  and  FV of MYR10.51. We expect the group to register  core earnings of MYR76.7-MYR106.6m from  FY13F-15F,  which  implies  a  CAGR  of  55.9%  over  FY12’s MYR28.1m.  We  like  DSON’s:  i)  strong  earnings  growth  trajectory,  ii) committed  management  team,  and  iii)  proven  track  record  in implementing security-enhanced identification measures.

• Background.  DSON  is  involved  in  the  provision  of  information  and communications  technology  (ICT)  solutions,  which  include  smart  card personalisation  services  and  customisation  of  large-scale  government ICT solutions. Some of the key projects that the group was involved in are  the  rolling  out  of  national  identification  (ID)   cards  in  2001  and  the implementation of a payment multi-purposed card (PMPC) programme in 2003 to replace cards with magnetic stripes with chip-based ones.
• New  MyKad  the  present  core focus.  In 2011, DSON was awarded a MYR73.1m contract to supply 4m new  MyKads  with  enhanced security features to the National Registration Department from 1 Jan 2012 until 31 Dec 2013.  Due to  the  overwhelming demand, the group  received  an extension  worth  MYR182.8m  on  its  contract  to  supply  10m  more  raw MyKads to be delivered by December this year. In view of the successful roll-out, our checks with sources indicate that the Government is looking to place orders for 10m more new cards worth MYR180-190m sometime in 1Q14 in its efforts to curb identity fraud-related crimes.  
• Work started on new passports.  In 2012,  DSON  won a contract worth MYR284.7m to supply photo pages  for 10m passports over  five  years. The  company started supplying  the  sheets in 3Q13,  with management indicating an approximate annual run-rate of 2.4-2.5m copies.
• Earnings projection.  Leveraging on  contributions  from  these two main contracts, we are forecasting for DSON to more than double its net profit by FY13F to MYR76.7m. Taking into account the potential replenishment of 10m new MyKads  come 2014,  as well as likely margins enhancement post  completion  of  its  new  MyKad  assembly  plant  by  end-FY13F,  we foresee  the  group’s  bottomline  potentially  breaching  the  MYR100m threshold come FY15F.

Sturdy Growth Prospects Ahead

Established  in  1980.  DSON  is principally involved in the provision of ICT  solutions which include: i)  smart card personalisation services,  ii)  customisation of large-scale government  ICT  solutions,  iii)  project  management,  and  iv)  technical  consultancy services. Established in 1980 under the name of Bumi Packaging & Storage (M) SB, the company started off providing ICT products in the form of computer forms and credit card imprinters to financial institutions in Malaysia.

1999 an important milestone. In 1999, DSON marked an important milestone when it became the technology provider and exclusive sub-contractor of Dibena Enterprise, which was appointed as chairman and key member of GMPC Corp SB. GMPC Corp is  a  consortium  comprising  five  companies,  namely:  i)  Dibena  Enterprise,  ii)  IRIS Technologies (M) SB, iii) Unisys MSC SB, iv) Tricubes NCR JV SB, and v) CSA MSC SB  –  which was  appointed by the Government to undertake  its  multi-purpose  card (GMPC) project. Under this project, GMPC Corp  was tasked  with rolling  out national IDs (ie  MyKad,  MyPR  and  MyKid).  DSON,  through Dibena Enterprise,  was assigned to design, set up and commission a personalisation centre as well as supply smart card personalisation systems and solutions and consumables. It was also tasked with providing  technical  support  and  maintenance  services  to  the  National  Registration Department.  The  GMPC  project  was  officially  launched  in  2001  to  migrate  all Malaysian  citizens’  paper-based  IDs  cards  to  smart  IDs  cards  with  multiple applications. Over 28m copies have been issued since then.

Making  a  mark  in  payment  cards  in  2003.  In  2003,  DSON  assisted  in  the implementation  of  the  PMPC  program,  which  aims  to  clamp  down  on  fraudulent financial transactions. Under this programme, all cards with magnetic stripes, such as automated teller machine (ATM) cards  –  as well as Europay, MasterCard and  Visa (EMV) credit cards – were replaced by chip-based cards.

Listed on Bursa’s  Main  Market in 3Q12.  The share price of DSON  –  which was listed  on  Bursa  Malaysia’s  Main  Market  in  Sept  2012  with  an  initial  market capitalisation of MYR180m  –  has more than quadrupled over the last 12 months.  Its management  is  currently  led by  managing  director  Dato’  Abu  Hanifah  bin  Noordin, who is also the CEO and major shareholder in Dibena Enterprise. Deputy MD  Chew Ben Ben joined DSON  in  2006. Currently,  the company’s  free float is estimated at 36%. To improve its share liquidity, management proposed a 1-to-5 share split on 18 Oct. We expect this exercise to be completed by end-2013.

All focused on new  MyKad.  In 2011,  DSON  won  a MYR73.1m contract to supply 4m  new  MyKads  made  from  100%  polycarbonate  material  bearing  new  security features,  an  operating  system  and  chips  to  the  National  Registration  Department from 1 Jan 2012 up to 31 Dec 2013. Due to the overwhelming demand, the company delivered  the  4m  of  contracted  cards  in  2012.  As  a  result,  on  5  Dec  2012,  DSON received  an  extension  worth  MYR182.8m  to  supply  an  additional  10m  new  raw MyKads,  to be delivered by December. In 1H13,  DSON  delivered close to 3m  of the total number of cards ordered. Management indicated that full year delivery will be to the tune of 6-7m cards for 2013, with the remainder to be delivered in 2014.

Another MyKad  contract  extension  likely.  Looking forward,  DSON’s management is hopeful  of getting another extension on its  contract  to supply  new  MyKads  come 2014.  In  view  of  the  cards’  successful  roll-out,  our  checks  with  various  sources indicate  that  the  Government  is  looking  at  placing  an order  for  another  10m  cards worth  MYR180-190m  to  combat  identity  fraud-related  crimes.  This  ties  in  well  with management’s move to set up a new  MyKad  assembly plant in Jalan 223,  Petaling Jaya. This new site is expected to cost MYR30-35m  and  includes  land, renovation and machinery costs. We believe that the plant, when ready and commissioned by year-end,  could  potentially  boost  the  30-35%  gross  margin  of  the  MyKad,  as  we expect  DSON  to  extract  some  cost  synergy  from  assembling  the  card  on  its  own rather than outsourcing to third parties.

Source: RHB