• Stay NEUTRAL, new MYR0.54 TP from MYR0.57, 2% upside and c.3% FY23F (Mar) yield. 1QFY23’s core profit of MYR12m was below expectations on the absence of MyKad deliveries and higher-than-expected staff costs. We expect the earnings recovery to sustain into the quarters ahead on MyKad order resumptions and sustained pent-up demand for passport-related solutions – amid stronger outbound travel demand, as most nations have moved into the endemic phase. Yet, the share price may have already reflected the optimism in the absence of new contract wins.

• Slight miss. 1QFY23 revenue and core profit of MYR64.1m (+268% YoY) and MYR12m (1QFY22: loss-making) came in slightly below expectations at 17.6% and 15.1% of our and Street’s full-year forecasts (in view of stronger quarters ahead). This was on higher-than-expected staff costs and tax expenses following Datasonic Group’s pioneer status expiry. The stronger earnings YoY were aided by higher orders for MyKad and passport-related solutions – it more than offset the higher staff costs and tax expenses. QoQ revenue rose by 17.9% on higher supply of passports and MyKad consumables. Still, core profit contracted by 10.9% QoQ due to absence of MyKad deliveries (higher margins), and higher staff costs and tax expenses. A first interim DPS of 0.25 sen (1QFY22: none) was declared.

• Sustained orders recovery. 1QFY23’s passport chips and booklet deliveries were at 500k (4QFY22: 450k) while polycarbonate data pages sequentially improved to 681k (was 226k) amid higher passport issuances. There were no MyKad deliveries, but there were 686k consumables. We expect MyKad orders to resume in the upcoming quarters while passport- related solutions remain in high demand amid the resumption of outbound travel – this is as the number of expired passports remains elevated.

• Outstanding orderbook. Datasonic’s outstanding orderbook now stands at c.MYR418.5m, which provides c.1.7x cover ratio in a normalised operating environment. Management is still actively pursuing various new programmes and initiatives to further boost its orderbook, especially in digital solutions – eg national digital identification cards – and within its core competencies in new MyKad and i-Kad solutions.

• Forecast and ratings. We lower FY23F earnings by 7.8% but raise FY24F bottomline by 14.5% as we factor in the higher costs and effective tax rates for FY23-24 while raising our FY24 passport order assumptions. Our TP is lowered slightly to MYR0.54 based on unchanged 25x P/E as we roll forward the valuation base year to CY23. We apply a 0% ESG premium/discount to our TP, given that Datasonic’s ESG score of 3.0 is in line with our country median. We stay NEUTRAL on the stock, as we remain optimistic that a V-shaped earnings recovery – on the resumption of strong passport orders – are in the price in the absence of new project wins.

• Key upside/downside risks include stronger-/weaker-than-expected orders and new contract wins/non-renewals.

Source: RHB Research - 1 Sep 2022