• Keep BUY, new MYR0.61 TP from MYR0.68, 53% upside and 6% FY26F (Mar) yield. We are positive on Datasonic Group's passport-related contracts extension and comprehensive maintenance services for the Facial Live Capture (FLC) image system from the Home Affairs Ministry (KDN) worth MYR156.8m. The contract wins are within expectations and is testament to the group's product quality and services over the past decade in various mission-critical projects.
• Contract extension for supply of e-Passport solutions. DSON received the extension from KDN for Malaysian passport document and polycarbonate biodata page supply for an additional third ceiling contract value of MYR150.5m. This extension is for another year from 1 Dec 2024 to 30 Nov 2025. We understand proposals for an improved version of such passport solutions and new printing systems are still being evaluated.
• Separately, DSON won the comprehensive maintenance services contract for the FLC image system from the ministry. This MYR6.4m contract includes equipment, software, and application at all Immigration Department of Malaysia issuing and receiving offices for a period of 36 months commencing 25 Feb 2025 to 24 Feb 2028. This contract win is within our order replenishment assumptions.
• Looking to replenish the orderbook. Following the contract extensions, the current orderbook is in excess of MYR260m. Management also remains committed towards penetrating into more overseas projects, given DSON's cost competitiveness and security documents quality. Locally, more auto gate and IT-related jobs are being targeted.
• Outlook. The group's earnings outlook remains healthy on the back of sustained strong demand for its various government-related solutions and margins expansion stemming from ASP adjustments. The current share price overhang from the absence of long-term contract extensions for both of DSON's MyKad and passport-related solutions should ease with yet another contract extension being secured.
• Forecast and ratings. We maintain our forecasts as the contract wins are within our expectation. However, our TP is lowered to MYR0.61 as we roll forward our valuation base year to FY26F at an unchanged 20x P/E (at the 5-year mean). Note: Our TP is inclusive of a 2% ESG premium, given DSON's 3.1 score is above the country mean. We like the group for its competitive strength in its niche solutions, healthy yields, strong cash flow generation, and potential upside from new project wins at attractive valuations.
• Key downside risks: Higher input costs, weaker-than-expected orders, non-renewal of contracts, and changes in government policies.

Source: RHB Research - 21 Jan 2025