• Maintain BUY and MYR0.57 TP, 32% upside with c.5% FY24F (Mar) yield. Datasonic Group’s 1HFY24 core earnings of MYR36.7m (-0.3% YoY) met expectations with sustained demand from both MyKad- and passportrelated orders. FY24F earnings growth will be underpinned by contributions from a new i-Kad project but there could be a gap in the revenue contribution from MyKad while waiting for the official contract extensions. The current below-mean valuation is attractive and the current share price overhang will be lifted when DSON secures contract extensions on its existing solutions.

• Met expectations. 1H24 revenue and core profit of MY172.1m (+9.1% YoY) and MYR36.7m (-17.9% QoQ, +52.5% YoY) were at 44.2% and 45.9% of ours 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 the quarters ahead. A second interim DPS of 0.6 sen (2QFY23: 0.5 sen) was declared, going -ex on 14 Dec 2024.

• Sustained demand. 2QFY24 earnings was flattish QoQ, underpinned by higher passport chips and booklets, at 810k (1QFY24: 710k), while that of polycarbonate data pages were lower at 725k (was 744k), offsetting lower myKad and consumables deliveries of 488k and 20k. Meanwhile, higher YoY performance was helped by stronger smart cards and passport-related solutions. The lower EBITDA margin of 38% (2QFY23: 49.1%) was dragged by higher contribution from the personalisation service to banks.

• Awaiting contract extension. 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 DSON’s strong track record and timely delivery of mission-critical national security documents. We understand it is business-as-usual (BAU) at the moment for all the raw material planning to ensure no disruption in the supply of these public delivery. 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 MYR234m (from MYR307m in 1QFY24). Management is actively pursuing various contract renewals, including various maintenance contracts and supply of autogate systems. Furthermore, other solutions and e-services related to foreign workers and 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 are also among other projects that are progressing.

• 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 Dec 2023