• Keep BUY and MYR0.68 TP, 30% upside and c.5% FY25F (Mar) yield. Last Friday, the Home Affairs Ministry alluded to the availability of an optional 10- year validity passport. Based on our scenario analysis, revenue and profitability is expected to surge in the next 4-5 years given the potential higher ASP, but we anticipate volume to decline by more than half from 2030 before normalising in 2035. The change in policy may have raised the barrier of entry and/or could result in a longer-term contract period.

• 10-year validity passport set to go ahead. Based on news reports, Home Minister Datuk Seri Saifuddin Nasution Ismail said that the Immigration Department is ready to issue the Malaysian passport with a 10-year renewal option (at a higher price) apart from the current 5-year validity when officiating the opening the Immigration Department passport office at the Kota Kinabalu International Airport. However, the implementation date has yet to be decided and will be announced at a later date.

• Short-term positive, medium-term negative, long-term neutral. Assuming the option of the 10-year validity is available from 2025, we believe a majority of Malaysians would likely opt for the longer validity even though it will cost more given the cheaper cost per year and the hassle of going through the renewal process. This should result in higher revenue and profitability to Datasonic Group in the next 4- 5 years assuming a higher ASP for the supply of passport booklet with extra pages. However, we also expect the cost to inch up given the increase in complexity and higher machinery wear and tear of producing extra data pages. Roll forward to 2030-2034, the volume of passport renewal may reduce by more than half given the longer passport validity, before normalising from 2035.

• Scenario analysis. We conducted a scenario analysis on the potential impact to our FY26F earnings and TP, assuming i) 80% of the annual volume of 2m- 2.5m opt for the 10-year validity passport and ii) factoring in the increase in ASP and costs of 20-60%. We arrived at a potential FY26F earnings change of -1.3% to +15.5% and TP range of MYR0.46-MYR0.66 (based on 15–20x FY26F P/E), based on the assumptions presented in Figures 1 and 2 on page 3.

• Forecast and ratings. The change in government policy may disrupt the stability of DSON’s earnings in 2030-2034 should it remain the vendor for Malaysia’s passport solutions. Nonetheless, this may deter potential competitors given the high capex requirement, and increased risk premium on the uncertainty in volume during the transition period. As such, diversification of its business exposure will be essential to cushion its profitability from 2030. Forecasts are unchanged pending the details and guidance from management. Our TP remains at MYR0.68, based on an unchanged 20x FY25F P/E (at its 5- year mean), and includes a 2% ESG premium. Key downside risks: Higher input costs, weaker-than-expected orders, non-renewal of contracts and change in government policy.

Source: RHB Research - 15 Jul 2024