• Maintain BUY and MYR0.68 TP (52% upside), with c.6% FY25F (Mar) yield. Datasonic Group’s 1QFY25 earnings reached its second-highest level ever, meeting expectations, supported by sustained high demand for its passport and identity card-related solutions and sturdy margins. FY25 earnings are expected to trend higher, supported by healthy demand, margin expansion, and contribution from new projects. We believe the stock is undervalued vs its peers and historical valuation, given its healthy yield, strong cash flow generation, and potential upside from new project wins.

• Met expectations. DSON’s 1QFY25 revenue of MY90.8m (+7% YoY) and core profit of MYR27.1m (+48.4% YoY) met expectations at 27% and 26% of our and consensus’ full-year estimates. YoY revenue growth was supported by higher demand for both passport and smartcard solutions, coupled with higher ASPs and lower depreciation, leading to the margin expansion. A first interim DPS of 0.75 sen (1QFY24: 0.6 sen) was declared, going ex on 13 Sep.

• Sequentially weaker. 1QFY25 core profit was down 29.9% QoQ, mainly on lower orders for smartcard solutions from a high base, following the resumption of MyKad deliveries during the last quarter. Passport chip and booklet deliveries were flattish at 710k, along with polycarbonate data pages at 642k (from 744k). MyKad card and consumables came in at 432k (1QFY24: 487k) and 583k (1QFY24: 694k) respectively, while iKad order volumes exceeded 100k.

• Outlook. We remain optimistic on DSON’s FY25 outlook on the back of sustained strong demand for its various government-related solutions and the margin expansion stemming from ASP adjustments. The group is also eyeing various new projects in auto-gate, foreign passport, and other solutions. Its outstanding orderbook is estimated at c.MYR240m.

• Forecasts and ratings. No changes to our forecasts and TP of MYR0.68, based on an unchanged 20x P/E (at the 5-year mean). We incorporated a 2% ESG premium into our TP as DSON’s ESG score of 3.1 is above the country median.

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

Source: RHB Research - 30 Aug 2024