• Maintain BUY, with new MYR0.57 TP from MYR0.56, 35% upside and c.5% FY24F (Mar) yield. The resumption of MyKad and consumables supply, coupled with strong demand for passport-related solutions propelled Datasonic Group’s core earnings to a multi-year high of MYR75.7m, which came in line. The company’s ability to secure any contract extension on its existing solutions should lift the current share-price overhang. Also, its current below-mean valuation presents a good buying opportunity.

• Solid demand continues. FY23 revenue and core profit of MY344.7m (+152.7% YoY) and MYR75.7m (+6.3x YoY) accounted for 94.3% and 95.4% of our and consensus full-year forecasts – broadly in line. A fourth interim DPS of 0.75 sen (4QFY22: 0.25 sen) was declared, bringing YTD DPS to 2 sen. 4QFY23 revenue of MYR104.9m (+27.8% QoQ, 93.1% YoY) translated to a core profit of MYR22.3m (+33.4% QoQ, +65.5% YoY), supported by stronger orders for its various solutions.

• Effective supply chain planning and execution allowed DSON to ensure sufficient supplies meeting the demand for the national security documents during the quarter where the passport chips and booklet deliveries were at 850k (3QFY23: 600k) while polycarbonate data pages were up sequentially at 870k (from 828k). There was 582k MyKad consumables delivery (up from 423k QoQ) and 611k for raw card & chips. Meanwhile, contributions from other contracts/orders such as bank card personalisation and recognition from the various security documents and maintenance service were stable.

• Outstanding orderbook is estimated at MYR339m (from MYR412m). Management is actively pursuing various contract renewals, inclusive of various maintenance contracts, the supply of MyKad (existing contract ended on 14 May 2023) in which the delivery of cards may take place till Aug 2023 as well as further extension to the its passport-related solutions beyond 30 Nov 2023 to ensure the continuity of supply for critical national security documents. Besides, management is also still actively pursuing new programmes and initiatives to further boost its orderbook, such as digital identification cards and the identity management system under the memorandum of agreement or MoA with the Ministry of Urban Planning, Housing and Territorial Development of the Republic of Guinea.

• Forecast and ratings. We keep our forecasts as the results were in line. Our TP inches up slightly to MYR0.57 (from MYR0.56) as we roll forward our valuation base year to FY24F (Mar), based on unchanged an 20x P/E (at 5- year mean), inclusive of a 2% ESG premium given the increase in its ESG score to 3.1 from 3.0. Key downside risks include higher input costs, weaker- than-expected orders, and non-renewals of contracts.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we tweaked our ESG weightage. We assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research note Envisioning a Better Future.

Source: RHB Research - 29 May 2023