• Stay NEUTRAL, new MYR0.52 TP from MYR0.54, 4% upside and c.4% FY24F (Mar) yield. Datasonic Group has accepted the Letter of Award from the Home Affairs Ministry or KDN for the supply of foreign worker identification cards, ie the I-Kad, commencing from 1 Nov 2022 to 31 Oct 2025 for a contract value of MYR140m. We are positive on the long-awaited project win, as it will contribute significantly to Datasonic’s bottomline for the next three FYs and demonstrate the capability of the group to deliver and execute projects with regards to national security.

• I-Kad finally in the bag. After much delays from the Government, the MYR140m foreign worker identity card or I-Kad contract – which will see the supply of 10m cards over a 3-year period – finally being awarded to Datasonic. The group’s in-house card operating system is internationally certified with EAL Evaluation Assurance Level 4+ or EAL4+. The enhanced security features proposed for the I-Kad, alongside cost efficiencies, are also believed to be in line with the authority’s aspiration to improve the security identification features for all incoming foreign workers.

• Outstanding orderbook to anchor future earnings. After securing the I- Kad contract, Datasonic’s total outstanding orderbook now stands at c.MYR558.5m and provides 2x cover ratio in a normalised operating environment. To build on the contract win, management is still actively pursuing new projects, eg the national digital identification and platform business for Electronic Know Your Customer or e-KYC. Assuming a net margin of 30%, this contract is expected to boost bottomline by c.20%. We take the opportunity to factor in the earnings contributions from this new contract and raise the passport order assumptions (spill-over from pent-up demand after the reopening of borders) by lifting FY24F-25F earnings by 28.8-36.6%.

• We stay NEUTRAL on the stock, as we believe the optimism in a V- shaped earnings recovery are factored in the price. Besides, the potential impending risk on the imminent 15th General Election or GE15 will weigh on investor sentiment, given Datasonic’s nature of business as a contractor in the public space, as well as the backdrop of a rising bond yield/interest rate environment. Hence, our TP is lowered slightly to MYR0.52 based on a lower 20x CY23 P/E from 25x, in line with its 5-year mean. We apply a 0% ESG premium/discount to our TP, given Datasonic’s ESG score of 3.0 is in line with our country median.

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

Source: RHB Research - 8 Nov 2022