1QFY16’s MYR12.4m net profit came in marginally above our expectations, owing to better-than-expected MyKad consumables orders, but we make no changes to our forecasts as we expect the runrate to normlise going forward. Upgrade to BUY (from Neutral) with our TP unchanged at MYR1.22 (15% upside, 25x 2016 P/E) following the recent share price retracement.

Results review. 1QFY16 (Mar) revenue expanded 13.5% QoQ to MYR54.4m as Datasonic delivered 1m copies of MyKads and 600,000copies of passport photo-pages during the quarter. Meanwhile, core earnings jumped 81.9% QoQ to MYR12.4m, at 24% of our full-yearestimate. This trumped our previous MYR8m-10m guidance due tobetter-than expected orders for its MyKad consumables at 3m units (5QFY15: 1m). We estimate that the group is currently sitting on an outstanding orderbook of 5.5m/4.5m/4.3m copies for its MyKad/MyKad consumables/passport photo-pages as at June. 1QFY16 numbers are generally weaker YoY due to slower orders for its MyKad delivery.

More passport-related jobs. Datasonic announced on Bursa Malaysiarecently that it has submitted three proposals to the Home AffairsMinistry in relation to Malaysian passports and information and communications technology (ICT) solutions – discussions are currently ongoing. We suspect that one of the proposals submitted involves providing smart chips for Malaysian passports to complement the group’s existing procurement of photo pages. The contract could bring in additional revenue of MYR60m-70m pa. We believe the official award totake place by the end of 3Q of this year.

Forecasts and risks. We make no changes to our FY16F-18F earningsas we expect the run-rate for its existing contracts to normalise going forward. Key risks include potential slowdown in MyKad orders from the Government and delays in contract extensions or new job awards.

Maintain BUY. We are upgrading our call to BUY (from Neutral) with our TP unchanged at MYR1.22 (25x 2016F P/E) following the recent share price retracement. We like Datasonic’s unique status as a national security solutions provider and we believe potential extension of its existing MyKad and passport contracts, and winning of new jobs could propel earnings growth in the long run and, hence, help to re-rate share price going forward.