We downgrade our call on Datasonic to NEUTRAL (from Buy) with an unchanged MYR1.22 TP (6.6% downside) following the recent recovery in its share price. Key re-rating catalysts include the extension of its existing MyKad and passport contracts, and potential new job wins within its core strength and national security space focus.

Healthy orderbook. Management guided at a recent briefing that Datasonic has an outstanding orderbook of 5.5m/4.5m/4.3m copies for its MyKad/MyKad consumables/passport photo-pages respectively as at June. Additionally, it has ~MYR45.5m worth of jobs for delivery under its surveillance and maintenance divisions – largely in line with our previous guidance. On a side note, Datasonic’s MYR99.5m trade receivables (which implies close to 180 receivable days) may seem high at first. We expect this to be settled progressively and believe default risks are minimal, as its two largest customers (the immigration and national registration departments) make up >80% of the amount outstanding.

Going full-fledged on passports. Our channel checks indicate that the group is currently bidding for the provision of smart chips for Malaysian passports. The existing contract is delivered by one of its peers and is set to expire by mid-2016. As part of its value proposition, sources highlighted that Datasonic intends to integrate the smart chips into its own passport photo-pages to be compliant with latest international security standards. We estimate that the contract could bring in an annual revenue stream of MYR60m-70m, with the official award to take place by end-3Q15. In addition to that, we gathered from external sources that Datasonic is looking to bid for the provision of booklets for the national passports. This makes sense to us as the group aspires to be a one-stop security solution provider, as evident in its current provision of a full set of solutions for the MyKad.

Downgrade to NEUTRAL. We make no changes to our earnings forecasts at this juncture, as we reiterate our MYR1.22 TP based on 25x 2016F P/E. While we continue to like Datasonic’s unique status as a national security solutions provider, we believe the stock is perfectly priced for now. As such, we downgrade our call to NEUTRAL. Key re-rating catalysts include the extension of its existing MyKad and passport contracts, and potential new job wins within its core strength and national security space focus.

Financial Exhibits

SWOT Analysis

Company Profile

Datasonic Group is principally involved in the provision of ICT solutions that include smart card personalisation services, customisation of large-scale government ICT solutions, project management and technical consultancy services.

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Source: RHB Research - 10 Sep 2015