• Keep NEUTRAL and MYR0.52 TP, 2% upside and c.3% FY23F (Mar) yield. 1HFY23 core profit of MYR36.8m met our expectations, but was below consensus’. The significant improvements in both revenue and core profit YoY were aided by order resumptions for MyKad and pent-up demand for passport-related solutions. We remain NEUTRAL as the share price may already reflect the optimism on strong earnings, while market sentiment may continue to be undermined by heightened regulatory risks.

• Within expectations. 1HFY23 revenue and core profit of MY157.7m (+242% YoY) and MYR36.8m (1HFY22: loss-making) came in at 58.7% and 46.3% of our and Street’s full-year forecasts. The results met our expectations but were below consensus’, as the coming quarter may trend lower QoQ on the bottleneck of passport polycarbonate delivery. The stronger YoY and QoQ earnings growth in 2QFY23 to MYR24.8m were aided by higher orders for both MyKad and passport-related solutions, and more than offset payroll and tax expenses. A second interim DPS of 0.5 sen (2QFY22: 0.125 sen) was declared.

• Strong passport orders. 2QFY23 passport chips and booklet deliveries were 850k (1QFY23: 500k) while polycarbonate data pages rose to 838k (was 681k) sequentially, amid higher passport issuances. During the quarter, there were 400k MyKad and 1.16m consumables orders (up from 686k in 1QFY23). We expect strong MyKad orders to continue in the upcoming quarters while passport-related solutions may decline due to supply bottleneck issues. However, demand for passport remains robust with the resumption of outbound travel and as the number of expired passports remain elevated.

• Outstanding orderbook. Datasonic’s outstanding orderbook is estimated at MYR480m, which provides c.1.9x cover ratio in a normalised operating environment. Following the win earlier this month of MYR140m in i-Kad solutions, management is still actively pursuing new programmes and initiatives to further boost its orderbook, such as national digital identification cards and the new MyKad solutions.

• Forecast and ratings. We keep our forecasts and MYR0.52 TP, based on a 20x CY23 P/E, in line with its 5-year mean, inclusive of a 0% ESG premium/discount to our TP, as Datasonic’s ESG score of 3.0 is in line with our country median. We stay NEUTRAL, as we believe the optimism of a V- shaped earnings recovery is reflected in the price. The potential change in public policy from the new Government may weigh on market sentiment, given the group’s nature of business as a contractor in the public space, as well as on the backdrop of a rising bond yield/interest rate environment.

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

Source: RHB Research - 30 Nov 2022