• Maintain BUY and TP of MYR0.57, 18% upside with c.5% FY24F (Mar) yield. Datasonic Group’s 1QFY24 core earnings of MYR18.3m (+52.5% YoY) met expectations, supported by stronger MyKad- and passport-related orders. FY24F should be a better year, underpinned by contributions from a new i-Kad project while the stock’s current below-mean valuation presents a good buying opportunity. We believe the current share price overhang will be lifted when it secures contract extensions on its existing solutions.

• Met expectations. 1QFY24 revenue and core profit of MY84.8m (-19.1% QoQ, +32.4% YoY) and MYR18.3m (-17.9% QoQ, +52.5% YoY) come up to for 22% and 19.9% of our and consensus full-year forecasts. We deem the results as in line, as we expect the commencement of the i-Kad project to propel earnings in quarters ahead. A first interim DPS of 0.6 sen (1QFY23: 0.25 sen) was declared.

• Sustained demand. The stronger 1QFY24 performance was underpinned by higher deliveries of passport chips and booklets, ie at 710k (1QFY23: 500k), while that of polycarbonate data pages were at 744k (was 681k). Similarly, higher MyKad and consumables deliveries of 927k and 694k contributed to the margin increase. Meanwhile, slower QoQ performance was due to lower passport-related solutions, partially cushioned by stronger MyKad deliveries.

• Optimistic for FY24. We remain hopeful on the contract extensions for the supply of raw cards and consumables (which expired in May) and passport related solutions (expiring in Nov 2023), given Datasonic’s strong track record and timely delivery of mission-critical national security documents. Sustaining high demand for these documents would work in favour of the incumbent to secure the extensions, to avoid from jeopardising the level of public services delivery. Also, the MYR140m i-Kad contract is expected to start contributing to group performance from August-September onwards – this may generate MYR10m-15m in profitability, depending on volume. Meanwhile, various maintenance services and the supply of autogate systems are also likely to elevate the group’s FY24 earnings.

• Datasonic’s outstanding orderbook is estimated at MYR307m (from MYR339m in 4QFY23). Management is actively pursuing various contract renewals, inclusive of various maintenance contracts and supply of autogate systems. The group is also exploring various other solutions and e-services related to foreign workers, while leveraging on its award-winning i-Kad solution. It is also still pursuing the identity management system contract under the memorandum of agreement with the Ministry of Urban Planning, Housing and Territorial Development of the Republic of Guinea.

• We keep our forecasts unchanged as the results are in line. Our TP of MYR0.57 is based on an unchanged 20x FY24F P/E (5-year mean), with a 2% ESG premium applied, as its ESG score is above the country median. Key downside risks include higher input costs, weaker-than-expected orders, and non-renewal of contracts.

Source: RHB Securities Research - 1 Sept 2023