• Upgrade to BUY from Neutral, new MYR0.56 TP from MYR0.52, 23% upside and c.4% FY24F (Mar) yield. 9MFY23 core profit of MYR53.5m exceeded our expectation. The significant improvement in revenue and core profit YoY was aided by order resumptions for MyKad and pent-up demand for passport-related solutions. We raise our forecasts in anticipation of strong earnings trajectory with surging demand for its smart card- and passport- related solutions, coupled with potential project wins. Upgrade our call following the recent share price weakness.

• Driven by strong demand. 9MFY23 revenue and core profit of MY239.8m (+192.1% YoY) and MYR53.5m (9MFY22: loss-making) came in stronger than our (at 85.3%), but were within consensus (at 70.9%) full-year forecasts. We expect the stronger orders to take place in 4QFY23 and beyond on the back of surging demand and easing of supply bottleneck for the smart card and passport-related solutions while the number of expired passports remains elevated. A third interim DPS of 0.5 sen (3QFY22: 0.125 sen) was declared, bringing YTD DPS to 1.25 sen.

• Sequentially slower. The weaker sequential earnings (-32.8%) in 3QFY23 to MYR16.7m was due to lower deliveries for both MyKad- and passport- related solutions and higher effective tax rate. During the quarter, passport chips and booklet deliveries were 600k (2QFY23: 850k) while polycarbonate data pages were flattish sequentially at 828k (from 838k). There was 423k MyKad consumables delivery (down from 1.16m in 2QFY23) but no orders for MyKad. Meanwhile, contributions from other contracts/orders such as bank card personalisation were up while recognition from the various security documents and maintenance service were stable.

• Outstanding orderbook. Datasonic’s outstanding orderbook is estimated at MYR412m (from MYR480m). Management is still actively pursuing new programmes and initiatives to further boost its orderbook, such as national digital identification cards, the new MyKad solutions and the identity management system under the memorandum of agreement or MoA with the Ministry of Urban Planning, Housing and Territorial Development of the Republic of Guinea.

• Forecast and ratings. We raise our FY23F by 28% but keep FY24F-25F relatively unchanged (+1.3% and +2.1%) after revising the order assumptions following the stronger-than-expected results and anticipation of surging orders in 4QFY23. Consequently, our TP is now raised to MYR0.56, based on unchanged 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 the country median. We believe the strong sustained earnings trajectory amid surging demand for its solutions and potential project wins coupled with the recent weakness in share price present solid buying opportunity.

• Key downside risks include weaker-than-expected orders, higher input costs and non-renewals of contracts.

Source: RHB Research - 28 Feb 2023