Datasonic’s  quarterly  earnings  of  MYR12.4m  came  in  within expectations.  While numbers may seem weak at first glance, we believe earnings momentum  should pick up substantially come 2QCY14 as we expect  the  group  to  deliver  4m  MyKad  copies  by  June  2014. Nonetheless, given the limited upside, we are downgrading our call to NEUTRAL with our FV unchanged at MYR4.08.

• Temporary  hiccup  in  earnings.  Datasonic’s  January-March  quarterly revenue  came  in  lower  at  MYR51.8m  (-28.6%  q-o-q,  -12.5%  y-o-y)  as contribution  from  its  MyKad  contract  weakened  during  the  quarter.  Of note,  the group only secured a tenure extension of its outstanding order of  4m  MyKad  in late  April.  These  4m identity  cards  were  supposed  to have been delivered by 31 Dec 2013. Given that the extension was only approved in April, we believe physical deliveries of the cards in JanuaryMarch  were  slower  at  an  estimated  1.2m-1.5m  for  the  quarter.  All  in, core  earnings  registered  MYR12.4m  (-45.5%  q-o-q;  -17.4%  y-o-y), coming  within  our  previous  guidance  of  MYR12m-14m.  We  expect earnings momentum  to pick up  substantially  come 2QCY14,  in order to deliver the outstanding 4m MyKad copies by 30 June 2014.
• Bonus  issue  to  be  completed  by  June.  Its  proposed  1-for-1  bonus issue  is  expected  to  go  ex  on  6  June.  Upon  completion,  Datasonic’s outstanding share base would increase to 1,350m (from 675m). This,  in our  view,  should  help  to  further  improve  trading  liquidity  by  enticing participation from retail investors in particular.
• Forecasts  and  risks.  We  adjust  our  model  to  reflect  the  change  in Datasonic’s  financial  year-end  from  December  to  March,  making  no major changes to our forecasts. Key risks include potential delay in  the provision  of  MyKad  and  national  passports’  photo-pages  which  we estimate to contribute over 85% of its earnings over the next two years.
• Downgrade  to  NEUTRAL.  Following  the  recent  appreciation  in  share price  which  leaves  limited  upside,  we  are  downgrading  our  call  to NEUTRAL with our FV unchanged at MYR4.08 based on  25.0x FY16FP/E.  Upon the  completion of the proposed  1-for-1 bonus issue which is set to go ex on 6 June, our FV will be adjusted to MYR2.04.

Source: RHB