• BUY, higher MYR0.63 TP from MYR0.57, 39% upside, c.5% FY24F (Mar) yield. Datasonic Group has accepted Letters of Awards worth MYR175m from the Home Affairs Ministry (KDN) for the supply of national identity (ID) cards, comprehensive maintenance services, and e-Passports solutions for another six months ending 31 May 2024. The contract extensions are within expectations, but the price adjustment is a positive surprise and should partly lift the share price overhang. While the extension tenure is brief, relevant agencies are evaluating proposals for longer contract tenures.

• Contract extension for supply of e-Passport solutions... DSON received the contract extension on 9 Jan from KDN for the following supply contracts: i) Malaysian passport chips, ii) Malaysian passport documents, and iii) polycarbonate biodata pages. The MYR135m worth of contracts were extended for six months (1 Dec 2023 to 31 May 2024) with an upward price revision. The existing passport-related solutions contracts expired on 30 Nov 2023. We note that the Government is currently evaluating an improved version of the passport solutions and new printing systems, which is why the current contract was extended only for six months.

• …and MyKad. Concurrently, DSON also – on 9 Jan 2024 – received the letter of extensions from KDN for the supply of MyKad, MyTentera, MyPOCA raw cards, consumables, and comprehensive maintenance services of card personalisation centres at the National Registration Department (JPN) for a period of six months. The new contract extensions are worth MYR40m with a price increase, and commenced on 1 Dec 2023 to 31 May 2024, before the new generation of MyKad is expected to be rolled out together with the new printing system. Recall that the previous contract expired on 31 May 2023, and DSON has been the vendor of the MyKad raw card, chip, and laser printing system since 2012.

• What is next? Following the MYR175m worth of contract extensions, DSON’s orderbook stands at c.MYR409m, providing 1.2x cover ratio. Moving forward, management remains committed to clinch the long-term contracts for ID card and passport solutions, along with the new hardware and printing systems, and other projects which include the foreign passport project, identity management system, auto-gate solution, and MyKid.

• We raise FY24F-26F earnings by 0.5%, 26.1%, and 49% after factoring in the new ASP and revising the volume assumptions accordingly. We expect sentiment on the stock to improve following the contract extensions, which ensure earnings sustainability, and remain hopeful for more contract wins to further boost the orderbook. We roll forward our valuation base year to CY24F, resulting in a higher MYR0.63 TP, based on an unchanged 20x P/E, with a 2% ESG premium applied (as DSON’s ESG score is above the country median). Key downside risks: Non-renewal of contracts, and fluctuations in orders.

Source: RHB Research - 10 Jan 2024