• Keep BUY, new MYR0.68 TP (from MYR0.64), 40% upside, and c.6% FY25F (Mar) yield. Following its post-results briefing, we remain optimistic on Datasonic Group being the preferred supplier for mission critical projects, which are expected to sustain its strong earnings into FY25, in addition to contribution from new projects. We raise our forecasts on sturdier orderbook and margin assumptions and still like DSON for its healthy yields, strong cash flow generation, and potential upside from new project wins at below-mean valuation.

• Earnings recap. DSON’s historic high FY24 revenue of MY368.3m (+6.8% YoY) translated to a record core profit of MYR91.1m (+22.5% YoY), outpacing expectations on stronger-than-expected orders for its passport solutions as well as sturdy margins. The strong revenue growth was supported by higher demand for both passport and smartcard solutions, coupled with its own ASP adjustments. Margin expansion from higher ASPs, economies of scale, and lower depreciation (majority of its equipment is fully depreciated) supported the stronger bottomline growth.

• Optimistic on contract renewal. While the current MyKad and passport- related solutions contract ended on 31 May, management is confident of contract renewal for identity card and passport solutions, given DSON’s track record in delivering mission-critical projects without disruptions, at competitive pricing. The company also participated in the c.MYR20m tender for the supply of 40 new autogates and maintenance of the Malaysia Automated Clearance System (MACS). Higher demand for autogate solutions is anticipated as the Government looks to improve the speed of immigration clearance for low-risk countries via autogate clearance.

• Other projects. DSON has secured a MYR20m 5-year e-passport supply contract from a West African country, and revenue contribution should commence from 4QFY25. Management looks forward to penetrate into more overseas markets following this win. Also, due to the pressing need for a reliable service provider following a recent major service disruption, DSON is now developing a new solution with artificial intelligence (AI) features to improve clearance time for the Mbike system at the Johor Bahru border control. If the proposal is viable, and a full revamp of the solution is required, it could lead to a contract worth up to MYR100m.

• Forecast and ratings. We raise FY25-26F earnings by 4.9% and 8.6% after factoring in higher orderbook and margins assumptions on lower depreciation charges, in the absence of new major capex. Our TP is now at MYR0.68, based on unchanged 20x FY25 P/E (at the 5-year mean). We have baked in a 2% ESG premium into our TP. Key downside risks: Higher input costs, weaker-than-expected orders, and the non-renewal of contracts.

Source: RHB Research - 4 Jun 2024