We hosted Datasonic at Invest Malaysia in HK  recently.  Meetings were well-attended,  with  representatives  from  >15  local  funds.  Management shared  potential  initiatives  going  forward  but  cautioned  near-term earnings  could  come  under  pressure  on  slower-than-expected  MyKadorders.  Thus,  we  cut  our  TP  to  MYR2.10  from  MYR2.50  (25.0x  FY16FP/E, 35.7% upside) following an earnings revision. Maintain BUY.

Potential  CCTV  initiatives.  Datasonic  was  previously  involved  in  the installation of closed-circuit television (CCTV) security camera systems in Penang.  Management  is  currently  exploring opportunities to replicatethis model in other parts of Malaysia  to help combat crime. This is in line with the Government’s aim to reduce the incidence of house break-ins by 5%  annually  from  2013  to  2015,  and  to  tackle  vehicle  thefts,  which contributed to 43% of the total index crime in 2011. 

Updates  on  fuel  job.  Its  30%-owned  associate  Fuelsubs  House  SB(FSH),  meanwhile,  is  in  the  midst  of  finalising  its  proposal  on  the  fuel subsidy  rationalisation  program.  Datasonic  intends  to  leverage  on  its existing  strength  by  implementing  the  program  via  MyKad  as  the  core platform. This would help to minimise upfront investment costs as vehicle owners  would  be  able  to  incorporate  their  respective  fuel  subsidy allocation into their existing  MyKad  vis-à-vis via the issuance of a new card.  On  a  side  note,  the  Second  Finance  Minister  Datuk  Seri  Ahmad Husni was recently quoted as saying that the proposed new mechanism for petrol and diesel subsidies has now been completed. We expect to hear more developments on this over the next couple of weeks. 

Potential  blip  in  earnings.  Management  cautioned  that  its  earnings over the  near term could come under pressure as orders for its  MyKaddelivery have slowed down since 1QFY15 (Mar). This, in our view, could translate into potential weakness in its 2QFY15 numbers  (to be released by end-November).  Taking that into account, we  cut our FY15F EPS by 23% and revised our FY16F EPS downward by 16% as we adopt a more conservative stance going forward. 

Maintain  BUY.  Following  our  earnings  revision,  we  reduce  our  TP  to MYR2.10, based on an unchanged 25.0x FY16F P/E. We expect a major re-rating  in  its  share  price  should  FSH  secure  the  fuel  subsidy rationalisation programme as the Government looks set to announce the new mechanism to the public. Hence, we are maintaining our BUY call.

Source: RHB