2QFY16 net profit of MYR12.4m came in within our expectations. Maintain NEUTRAL with our TP unchanged at MYR1.51 (6% downside, 25x 2016 P/E). Management declared a first interim DPS of 1.0 sen, which translates into 1H15 payout ratio of 54.6%.

Results review. 2QFY16 (Mar) revenue closed at MYR51.3m (-5.7% QoQ, -4.1% YoY) as the group delivered 1.3m copies of MyKad and 0.9m copies of MyKad consumables during the quarter. Core earnings, meanwhile, stayed flattish QoQ but improved 31.6% YoY to MYR12.4m owing to a better revenue mix on higher deliveries of MyKad. We deem this within our previous guidance of MYR11m-13m (see our 19 Nov report Datasonic Group : Waiting For The Next Re-rating Catalyst). We estimate that Datasonic enjoyed an outstanding orderbook of 4.2m/3.6m/3.7m copies of MyKad/MyKad consumables/passport photo-pages respectively as of Sep 2015.

More passport-related jobs. Our channel checks indicate that the group could soon finalise two proposals involving the provision of smart chips and booklets for Malaysian passports by end-2015/early 2016. We estimate that the two contracts combined could potentially bring in additional revenue of MYR80m-100m pa. We have already factored this into our forecasts assuming that Datasonic would provide the full set of solutions for both MyKad and national passports going forward.

Forecasts and risks. With the results largely in line, we make no changes to our FY16-18 earnings forecasts. Key risks include potential new jobs secured, a potential slowdown in MyKad orders from the Government and delays in contract extensions or new job awards.

Maintain NEUTRAL. We maintain our NEUTRAL call with our TP unchanged at MYR1.51, based on 2016 25x P/E. We derive a fair value of MYR1.12-1.82 (depending on scenarios) using the corroborative DCF valuation methodology (based on WACC of 8.2% and terminal growth rate of 1.0%). These implies 2016 P/E of 18.5-30.1x, which our target P/E multiple falls within.

Base-case DCF valuation. Under our base-case scenario, we assume Datasonic would provide the full set of solutions for both MyKad and national passports in the foreseeable future. We expect its capex to amount to MYR20m pa as its investment in new equipment would be minimal. This is given that the existing equipment is sufficient to handle annual recurring demand of approximately 2.0m copies of MyKad and 2.5m copies of national passports. We derive a fair value of MYR1.12.

Best-case DCF valuation. Under our blue-sky scenario, we assume that Datasonic would secure an additional revenue stream of MYR200m pa by FY19F with a target EBIT margin of 37.5%, on top of providing the full set of solutions for both MyKad and national passports in the foreseeable future. Under this scenario, we expect its capex to be sustained at MYR20m-25m pa on the replacement of existing equipment and procurement of new machineries.

Financial Exhibits

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.

Recommendation Chart

Source: RHB Research - 30 Nov 2015