• We favour Datasonic Group Bhd (DSON) for its strong free cash flow generation leveraging on its role as the sole provider of MyKad and passport solution to the government.

• In near term, we expect it to benefit from strong demand for passport driven by visa-free travel agreements. Besides that, positive developments can also be seen for the i-Kad segment whereby the implementation has been made mandatory to foreign workers.

• The company has consistently declared dividends on quarterly basis even during its hard time in FY21-22. Moving forward, we expect it to maintain dividend payout ratio of 75%, translating into FY25F DPS of 2.6sen/share and dividend yield of c.5%.

• We have a BUY recommendation on DSON with a TP of RM0.595, based on 17x PER pegged to FY25F EPS of 3.5sen.

Benefitting from Visa-free Travel Agreement

We are optimistic on DSON’s earnings outlook as we expect it to benefit from strong demand for passport leveraging on its position as the sole provider of passport solution to the government. Note that Malaysia’s passport issuance has surpassed the pre-covid levels (refer to Chart 1) and we expect this to stay strong amidst the expansion of visa-free travel agreements. For instance, China has just announced an extension of visa exemption until 31st December 2025 to citizens holding ordinary passports from 12 countries, including Malaysia.

Excellent Service Delivery Led to Contract Extension

We believe that its excellent service delivery in meeting the government expectation has led to the renewal of its services. Notably, it has managed to meet the heightened demand for both passports and MyKad, despite challenges such as supply chain disruptions and escalating costs. To recap, Ministry of Home Affairs (MOHA) on 5th January 2024 has granted Datasonic Group with (i) three Letter of Extensions (LOE) totalling RM134.96mn for the Malaysian Immigration Department (MID), covering the supply of passport chips, documents, and polycarbonate biodata pages, (ii) an LOE for maintenance services of card personalisation centres at the National Registration Department (NRD) worth RM11.35mn, and (iii) a Letter of Award (LOA) valued at RM28.69mn for MyKad, MyTentera, MyPOCA raw cards, and consumables supply. Positively, these contracts were awarded with unexpected price adjustments ranging from 10% to 15%. Aside from that, they also came with shorter six months extension period, indicating that the government may be assessing the new generation of MyKad and passports. While we foresee immediate implementation of this new cohort is unlikely, we maintain confidence that DSON will continue to secure contract extensions, given its extensive presence spanning over the years.

Creating Significant Barrier to Entry for its Competitors

While DSON’s major business risk lies on its heavy reliance on government projects, we believe that it has established a significant barrier for its competitors. This is underpinned by its exceptional track record with continuous enhancement of security features, along with in-house production of polycarbonate cards and data pages. Besides that, MyKad and passports are essential items which are not supposed to be prone to service disruption. We believe new entrants would face high costs and steep learning curve to get to the same standard as DSON’s service delivery.

i-Kad to Be Another Booster

The deployment of foreign worker card (i-Kad) project, with nationwide personalisation and issuance started in August 2023, are now operational at 15 Malaysian Immigration Department (MID)’s centres. Production and deliveries of i-Kad are progressing smoothly with card issuance reaching 100k units per month. Demand is expected to rise further as it has become mandatory for all approved visa foreign workers, including both new recruitment and renewals. The digital i-Kad app and enhanced portal, including employer notifications and doorstep delivery options, are also up and running for MID, creating values-added to the services. We anticipate that i-Kad segment to significantly bolster DSON's earnings in the future, with substantial contributions to be expected from FY25 onwards.

Auto Gates Potential

In a response towards concerns about airport congestion, especially at KLIA, the Home Ministry has initially opened the auto gate facilities to foreigners from 10 low-risk countries such as Singapore, Brunei, New Zealand, and the G7 nations. Recently, the list was expanded to include 36 additional countries, enhancing border control efficiency and facilitating smoother entry for a broader range of visitors. While this opportunity is not exclusive for DSON, the company holds a significant position within the auto gate market. Hence, we view this move as advantageous to DSON, as it is likely to experience increased demand for its auto gate solutions and strengthen its business resilience.

Earnings Forecast

We project DSON’s earnings to grow at a 3-year CAGR of 8% over FY23-26F, reaching RM100.5mn by FY26F. The growth will be primarily driven by increased demand for passports and i-Kad, while demand for MyKad is expected to remain stable. DSON also maintains a healthy operating cash flow, which is reflected in its solid balance sheet with net cash position. The company also has consistently declared dividends quarterly, notwithstanding its weak earnings in FY21-22. Excluding this period, its dividend payout ranges from 64-86%. Moving forward, we expect the company to maintain dividend payout ratio of 75%, translating into FY25F DPS of 2.6sen/share and dividend yield of 5%.

Recommend a BUY with TP of RM0.595

We have a BUY recommendation on DSON with a TP of RM0.595. Our current TP implies PER of 17x (+1SD of 3-year historical forward PER) and FY25F EPS of 3.5sen. We believe that DSON warrants a premium valuation, given its market dominance as the exclusive provider of passport solutions and Malaysian MyKad for over a decade. Key risk to our valuation is the potential breakup of DSON’s concession business monopoly which we think is unlikely at this juncture given its strong service delivery as mentioned above.

Source: BIMB Securities Research - 20 May 2024