Datasonic is looking to secure MYR800m-1bn worth of contract extensions and new jobs in 2016 which, coupled with the recent passport chips job win, would likely propel earnings to a new high in 2017. As such, we continue to advise investors to accumulate the stock. Maintain BUY with our TP unchanged at MYR1.87 (45% upside, 25x 2017F P/E).

MyKad renewal forthcoming as the existing MyKad contract is set to expire by mid-2016. Management is working on a potential renewal by proposing the national identification card’s next generation. We expect an official award by June. We are currently imputing for new MyKad and MyKad consumables contracts at 12m units each to be delivered over a 3-year tenure. Based on an average ASP of MYR17.50 per MyKad and MYR4.00 per MyKad consumable, the renewals could be worth MYR250m-260m. Data-page extension in the works. For its existing provision of data-pages for Malaysian passports, Datasonic has an outstanding orderbook of 3.2m copies as at Dec 2015. With the remaining balance set to be fully exhausted by 1Q17 the group is negotiating a 5-year extension of 13m-13.5m copies. We estimate that this potential extension is worth MYR370m-390m, based on an existing MYR28.40 ASP. We expect an official award to take place in 3Q16. Passport book supply contract around the corner. To complete its national passport offerings, Datasonic is finalising its discussions with the Government for the provision of the passport book. We expect the official award to take place by end-March. We believe the official commencement date is likely to coincide with its passport chip contract, ie on 1 Dec 2016. Our checks with sources indicate that the contract would cover 13m-13.5m copies to be procured over a 5-year tenure at a total value of MYR210m-230m.

Eyeing new initiatives. Beyond that, Datasonic is eyeing to roll out its security camera solutions in the Klang Valley after having installed close to 600 cameras in Penang for local municipalities. Management is looking to install 3,000 cameras and to set up surveillance centres for the municipalities involved. The contract could be worth MYR100m-120m. In addition, management intends to penetrate into other national security-related projects, possibly in neighbouring countries, over the medium term. For a start, the group is eyeing for potential joint-ventures (JVs) to bid for security-related projects in Indonesia. This, if it materialises, could be even more lucrative than its current home market in Malaysia, given Indonesia’s population size of close to 260m.

Key risks include potential delays in renewals of its existing MyKad and passport data-page contracts and further delays in finalising the longanticipated passport booklet contract. Maintain BUY. Given the appealing upside of over 45%, we maintain our BUY call with our TP unchanged at MYR1.87 (based on 25x 2017F P/E). We used DCF (based on 8.1% WACC and 1.5% TG rate) as a corroborative methodology and derived a valuation range of MYR1.29-2.00 (depending on the scenarios). Our TP falls into this DCF-derived valuation range

Next-generation MyKad award by June. Datasonic’s outstanding orderbook of MyKad/MyKad consumables stood at 2.6m/3.7m copies respectively as at Dec 2015. With the contracts set to expire by mid-2016, management is working on potential renewals by proposing the next generation of the MyKad, which contains enhanced security features on the national identification card. The technical evaluation process is currently ongoing, with an official award likely to take place by June before the existing contract expires. This is to ensure the continuity of supply. We are currently imputing for new MyKad and MyKad consumables contracts at 12m units each to be delivered over a 3-year tenure starting from mid-2016. Based on an average ASP of MYR17.50 per MyKad and MYR4.00 per MyKad consumable, the renewals could be worth MYR250m-260m.

Renewal of passport data-page contract by end-2016. Management highlighted that the run-rate for its existing provision of data-pages for Malaysian passports is clocking in at 2.6m-2.8m pa vis-à-vis the initial projection of 2m-2.5m pa. The group has an outstanding orderbook of 3.2m copies as at Dec 2015. With the remaining balance set to be fully exhausted by 1Q17, Datasonic is negotiating for a 5-year extension of 13m-13.5m copies. We estimate that this potential extension is worth some MYR370-390mbased on existing ASP of MYR28.40. More importantly, we expect a potential improvement in its overall profitability margins should the extension materialise. This is because we understand that most of the equipment and hardware has been provided for under the current contract. We expect the official award to take place in 3Q16. Passport chip supply could commence earlier. Recall that Datasonic had earlier on secured a 5-year contract for the provision of smart chips to be embedded in Malaysian national passports. This contract is valued at MYR318.8m (which translates into an ASP of MYR25.50 per chip) and is to commence by Dec 2016. Our channel checks,however, indicate that earnings accretion could commence by as early as June. This is because Datasonic is working on a potential interim contract, as we gathered that the current provision of these chips by one of its peers would be fully exhausted by mid-2016. We estimate that this interim contract (which we have yet to factor into our forecasts and could be awarded in 2Q16) could worth some MYR30m-35m and would likely be booked under its FY17 (Mar) financials.

Passport book supply contract around the corner. To complete its nationalpassport offerings, Datasonic is finalising its discussions with the Government for the provision of the passport book. We expect the official award to take place by endMarch. We believe the official commencement date is likely to coincide with its passport chip contract, ie on 1 Dec 2016. Our checks with sources indicate that the contract would cover 13m-13.5m copies to be procured over tenure of five years at a total value of MYR210m-230m.

Eyeing security camera initiatives. Beyond that, Datasonic is exploring opportunities to roll out its security camera solutions in the Klang Valley after having successfully installed close to 600 cameras in Penang for local municipalities. We understand that talks with the relevant authorities are currently ongoing , as management is looking to install 3,000 cameras and set up surveillance centres for the municipalities involved. We estimate that the contract could worth some MYR100m-120m if it materialises. Pin-based payment card. 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 (Bank Negara) has mandated the migration towards chipand-pin-based payment cards by Jan 2017. This would require the re-issuance of existing payment cards, which are currently based on the chip-and-sign platform.

Potential overseas venture. Management announced its intention to penetrate into other national security-related projects, possibly in neighbouring countries, over the medium term. For a start, the group is eyeing for potential JVs to bid for securityrelated projects in Indonesia. This, if it materialises, could be even more lucrative than Datasonic’s current home market in Malaysia, given Indonesia’s population size of close to 260m.

4QFY16 outlook. On a side note, the group is set to release its 4QFY16 results by end-May. We expect core earnings to come within our expectations at MYR11m-13m. This is on the back of the 1.1m-1.3m units of MyKad being delivered during the quarter. Risks. Key risks to our forecasts include potential delays in the delivery of its existing MyKad and passport photo-pages, further delays in finalising the passport booklet contract as well as competitive pressure from local peers.

Maintain BUY. Given the appealing upside of over 45%, we maintain our BUY call with our TP unchanged at MYR1.87, based on 25x 2017F P/E.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 3.5m-4m copies of MyKad and 2.5m-3m copies of national passports. We derive a fair value of MYR1.29.

Best case DCF valuation. Under our blue sky scenario, we assume that Datasonic would secure an additional revenue stream of MYR200m pa by FY19. This is with a target EBIT margin of 40% 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 machinery. Under these assumptions, we derive a fair value of MYR2.00.