Datasonic’s share price underperformance could soon come to an end as management is actively scouting for new business opportunities to expand its presence. We expect to hear more on potential orderbookreplenishment over the next 2-3 months. As such, we keep our BUY call and reiterate our TP of MYR1.29 (20% upside), on 25x 2016F P/E.

Back to the fuel-ture? Currently, RON95 petrol/diesel is sold at retail prices of MYR2.15/MYR2.05 per litre vis-à-vis previous highs of MYR2.30/MYR2.20 in Oct 2014. We are forecasting for crude oil to average at USD75-80 per barrel for 2H15 vis-a-vis USD60 currently. Should the recovery in crude oil prices prove sustainable, we believe the Government may revisit the fuel subsidy rationalisation scheme to ease the burden on lower-income households. Should this materialise, we see Datasonic as one of the frontrunners to bag the job, given its experience in the development of MyKad.

More passport-related jobs likely. To further strengthen its foothold within the national security identity space, our channel checks indicate that the group could be eyeing the contract to provide smart chips for Malaysian passports to complement its existing procurement of photopages. Under the present arrangement, smart chips are embedded in the back cover of Malaysian passports. We gather that Datasonic is proposing to integrate the contactless chip into the polycarbonate data page, which the group currently supplies, in order to enhance security. This, if materialises, could bring in additional revenue of MYR60m -70m pa. We believe the official award could take place by end-3Q15.

Long-term prospects. Datasonic was previously involved in the installation of closed-circuit television (CCTV) security camera systems in Penang. Management is currently exploring opportunities to replicate this model in other parts of Malaysia to help combat crime. On top of that, management intends to play a significant role in the country’s migration towards pin-based payment cards by Jan 2017. Recall that Bank Negara Malaysia had earlier mandated the migration towards chipand-pin-based payment cards by Jan 2017. This would require reissuance of existing payment cards, which are currently based on chip and-sign platform. In preparation for this potential influx of demand, Datasonic has recently invested MYR6m to expand and revamp its regional personalisation centre in Petaling Jaya, Selangor.

Light At The End Of The Tunnel Share price has underperformed over the past 12 months. Datasonic’s share price has retraced by over 45% over the last 12 months. This followed the delay in the implementation of the fuel subsidy programme in view of the weakness in global crude oil prices, which have declined 40% since Jun 2014. Although the initiative has since been temporarily shelved, we do not discount the possibility of a potential revival of the targeted rationalisation scheme, should global oil prices recover, in order to help ease the rising inflationary impact on do mestic households following the implementation of the goods and services tax (GST) in Apr 2015. Currently, RON95 petrol/diesel is sold at retail prices of MYR2.15/MYR2.05 per litre vis-à-vis previous highs of MYR2.30/MYR2.20 in Oct 2014. We are forecasting for crude oil prices to average at USD75-80 per barrel for 2H15 vis-a-vis USD60 currently. Should therecovery in crude oil prices prove sustainable, we believe the Government may revisitthe said scheme to ease the burden on lower -income households. Should that materialise, we see Datasonic as one of the frontrunners to bag the job, given: i) its experience in the implementation of MyKad, and ii) its expertise within the security solutions space.

Potential long-term prospects. In the long run, Datasonic aims to further diversify its income stream to help boost its recurring earnings base. It was previously involved in the installation of CCTV security camera systems in Penang. Management is currently exploring opportunities to replicate this model in other parts of Malaysia to help combat crime – in line with the Government’s aim to reduce house break-ins by 5% annually in 2013-2015, and to tackle vehicle thefts, which made up 43% of total index crime in 2011.

On top of that, management intends to play a significant role in the country’s migration towards pin-based payment cards by Jan 2017. Recall that Bank Negara Malaysia has mandated the migration towards chip-and-pin based payment cards by Jan 2017. This would require re-issuance of existing payment cards, which are currently based on the chip-and-sign platform. In preparation for this potential influx of demand, Datasonic has recently invested MYR6m to expand and revamp its regional personalisation centre in Petaling Jaya, Selangor.

Likely net cash by FY17. As of Mar 2015, Datasonic is sitting on a cash pile of MYR49.0m and total borrowings of MYR134.4m. While its implied net gearing of 38.3% may seem high at first glance, we note that its net receivables amounted toMYR99.5m, with over 95% of the balance due from the Government for its provision of MyKad and passport photo pages. We are forecasting for the group to turn into net cash by FY17 as we expect the Government to make payments progressively over the next 6-12 months.

Maintain BUY. We continue to like Datasonic given its unique status as the largest security solutions provider in the country. We expect positive news flow on potential orderbook replenishment over the next 2-3 months. As such, we are maintaining our BUY recommendation with our TP unchanged at MYR1.29, based on 25x 2016 P/E.