• We recently visited Datasonic Technologies Sdn Bhd (DTSB), a wholly-owned subsidiary of Datasonic Group Berhad (Dsonic), at its Petaling Jaya facility, where it specialises in the manufacturing of MyKad and passports.

• Our visit has reinforced our view that Dsonic’s security document manufacturing presents a significant barrier to entry for competitors, due to its near end-to-end service capability, high product quality, and competitive pricing offered to the government.

• We maintain a BUY call on Dsonic with a target price (TP) of RM0.63, based on 17x PER (average 3-year historical forward PER) to FY25F EPS of 3.7sen.

Exclusivity with High Barrier Entry

We recently conducted a site visit to Datasonic Technologies Sdn Bhd (DTSB) in Petaling Jaya, one of its two plants dedicated to MyKad and passport manufacturing. We also met with the key management personals:

(i) Chew Chi Hong (Danny), Executive Director of Datasonic Group Berhad (Dsonic),

(ii) En. Muhayuddin bin Musa, Deputy Managing Director of DTSB, and

(iii) Siti Nursyahirah Binti Jamlus, Operation Manager of DTSB.

Our visit reinforced the positive outlook on the company's exclusivity, which has established a high entry barrier for its competitors. The plant is a government-gazetted highly secured area, covering a 30K sqft built-up space and equipped with 110 CCTVs linked to the police station and immigration department, ensuring top-level security.

With an annual production capacity of 8mn for e-ID cards and 6mn for e-Passports, the facility is also home to a European-sourced Intaglio Printer, a government-controlled item with only 2 approvals issued in Malaysia for passport issuance. Additionally, the plant is also certified with the International Security Printing Intergraf Certificate (ISO 14298), setting the company to expand its business globally.

Key Highlights from Meeting with Management

i) Dsonic has proposed new designs for MyKad and passport Generation 2, with further security enhancement features. These proposals are currently awaiting government approval.

ii) The passport segment is expected to remain sturdy, supported by a backlog of approximately 2.8mn units post Covid-19, and China’s extension of visa exemptions until end of 2025.

iii) Issuance of i-Kad is also progressing well, with monthly production now exceeding 100k units. Demand is expected to grow further as i-Kad has become mandatory for new foreign hires and annual renewals.

iv) The company is gearing up to deploy 40 additional autogates at KLIA, following the government’s initiative to open up the autogates to 63 countries, effective from June.

v) Dsonic also has submitted tenders for a 3-year maintenance contract for Malaysia Automatic Clearance System (MACS) autogates and the installation of 40 more autogates at Bangunan Sultan Iskandar (BSI) in Johor.

vi) Dsonic continues to enhance its autogate’s technology with innovations such as facial recognition and bidirectional (2-way) gates (refer to Figure 1), of which has been deployed at Desaru Coast.

Key Advantages

Dsonic has established a strong competitive edge, bolstered by over 2 decades of exceptional performance in the industry. In our view, the company’s continuous efforts in developing in-house production, particularly for polycarbonate cards and data pages, allows the company to achieve economies of scale and offer competitive pricing to clients. Moreover, with its current capacity, Dsonic still has room to grow and fulfill the e-Passport project for the West African country that secured last May. Management has indicated that the first 200k passports will be offered at a more competitive and attractive rate, with delivery to be made within 5 months. For the subsequent 300k passports, management guided that there is potential for a price increase per unit. While the overseas project has yet to make a significant financial impact, we believe it positions Dsonic to strengthen its global presence and market share, while reducing its reliance on Malaysian government contracts.

As for autogates, Dsonic’s production capacity is 8 units/week, and 40 units/month. Dsonic offers solutions at a much more competitive price, compared to European options, which are priced at around USD1,000/unit. Consequently, we believe that competitors would face significant costs and a steep learning curve to match Dsonic’s rigorous standards.

Key Risks

While we remain optimistic on Dsonic's prospects, several key risks could impact our projections. One significant risk is the potential extension of passport validity from 5 to 10 years. Although this change might initially increase passport demand, it could reduce longterm volumes. Dsonic has been in discussions with the government on the necessary technology upgrades for the new 10-year passport, of which would require additional data pages per passport. The company is also proposing a zero-CAPEX commitment from the government, contingent on a certain minimum agreed number of units. However, we believe that if this materializes, the substantial impact would likely be felt only from 2030 onwards.

Apart from that, the company's reliance on a single Intaglio printer also presents a major risk, in our view, as any machine breakdown could disrupt production. But we believe the management has implemented careful measures, such as maintaining a production buffer and ensuring standby engineers are available to address any issues within a week to mitigate the risk.

Earnings Outlook and Dividend Prospects

We are maintaining our earnings forecast at this juncture, projecting the net profit to grow at a 3-year CAGR of 6%, driven by its core businesses – MyKad, passports, and i-Kad. Notably, Malaysia’s passport issuance up to June has reached 1.3mn units, surpassing the half-year average of 1.1mn units since 2015, excluding the Covid-19 years (refer to Chart 1). While for the i-Kad, we anticipate delivery in FY25F to be circa 3mn, of which, at RM14 per card, could add around RM42mn to the company’s revenue. Dsonic is also set to benefit from a strengthening MYR, as the raw materials which constitutes around 60% of its total cost, are imported from Europe and denominated in foreign currencies. Besides, management also indicated that the machineries will be fully depreciated by 1QCY25, hence leading to better efficiency and improved profit margins. Accordingly, we expect Dsonic to continue rewarding its investors with a strong dividend payout of at least 75% of its net profit, translating into a dividend yield of around 6%.

Reiterate BUY with a TP of RM0.63

We reaffirm our BUY call on Datasonic Group Berhad with a target price (TP) of RM0.63, based on a 17x PER (average 3-year historical forward PER) applied to the FY25F EPS of 3.7sen. We continue to favor the company for (i) its market leadership as the exclusive provider of MyKad and passport solutions, (ii) its promising international expansion initiatives, (iii) ongoing business diversification efforts, and (iv) attractive and stable dividend payouts.

Source: BIMB Securities Research - 23 Aug 2024