• Maintain BUY and MYR0.57 TP, 29% upside with c.5% FY24F (Mar) yield. We emerged from Datasonic Group’s update feeling positive on its FY24 outlook, which should be supported by the robust demand for its various solutions and the contribution of a new project. We believe its existing mission-critical national security contracts are likely to be extended – given the imminent expiry – to ensure continuity of supply. The company’s ability to secure contract extensions should lift the current overhang on its share price, while its below-mean valuation presents a good entry point.

• FY23 results recap. Lifted by strong demand for passport and MyKad- related solutions, FY23 revenue and core profit of grew 153% YoY and 6.3x YoY to a multi-year high of MY344.7m and MYR75.7m. FY23 total DPS amounted to 2 sen, indicating a 4.5% yield at current price levels.

• Various contract extensions clinched. We are positive on the recent contract extensions awarded by the Home Ministry (KDN), as it helped to alleviate the concern on the non-renewal of contracts temporarily. These extensions are: i) Three months’ extension on the supply of MyKad, MyTentera, MyPOCA raw cards for MYR12.5m, ii) a 6-month extension of comprehensive maintenance services of card personalisation centres for an additional contract value of MYR9.9m, and iii) amendment to the ceiling value for the additional supply of Malaysian passport chips, for MYR37.6m.

• Its outstanding orderbook is estimated at MYR387m (with the new contract extensions). We understand that management is actively pursuing various contract renewals for the supply of MyKad and passport-related solutions, as well as maintenance contracts including the auto-gate maintenance, Public Key Directory- and Public Key Infrastructure-related solutions. Management is also still actively pursuing new programmes to further boost its orderbook, such as digital identification cards and the identity management system under the memorandum of agreement with the Ministry of Urban Planning, Housing and Territorial Development of the Republic of Guinea.

• Still upbeat. We believe extensions of contracts concerning national security-related solutions are very likely, to eliminate the risk of interruptions that may affect the delivery of public services – given the imminent expiry of existing contracts by 2H23 in the absence of any new tender. These contracts were initially won through an open tender process. Manufacturing readiness, the quality of services and products, and the technical know-how that DSON has regarding mission-critical products are the other vital factors. FY24 (Mar) earnings are likely to hit another high, on the back of sustained strong demand and commencement of the new iKad supply contracts.

• We maintain our forecasts and TP, based on an unchanged 20x FY24F P/E (at the 5-year mean). Our TP includes of a 2% ESG premium based on our proprietary in-house methodology. Key downside risks include higher input costs, weaker-than-expected orders, and the non-renewal of contracts.

Source: RHB Research - 27 Jun 2023