• Keep BUY and MYR0.68 TP (71% upside), c.7% FY25F (Mar) yield. Datasonic Group’s 1HFY25 earnings of MYR47.5m (+31.3% YoY) met expectations on higher ASPs and iKad orders, offsetting lower volumes for other solutions. We expect the contract extensions for identification document (ID) and passport solutions (expiring end-Nov 2024) to be awarded in the near term, given its solid track record and services, but note that there could be a revenue gap in 4Q if there are delays. Current below-mean valuation is attractive, given DSON’s strong cash flow generation and healthy yields.

• Met expectations. 1HFY25 revenue of MYR171.8m (-0.2% YoY) and core profit of MYR47.5m were in line, at 48.4% and 47.3% of our and consensus’ full-year estimates. YoY revenue was flattish due to slower demand for passport and smartcard solutions, cushioned by higher ASPs, lower depreciation, and higher contribution from the iKad segment.

• Sequentially weaker. 2QFY25 core profit rose 13.7% YoY, mainly on higher ASPs and lower depreciation charges despite lower revenue (-7.1% YoY) from slower orders. However, core profit was down 25% QoQ on slower orders for all products, except for MyKad consumables and iKad. Passport chip and booklet deliveries were down to 450k (from 710k), but polycarbonate data pages were at 663k (from 642k). MyKad card and consumables stood at 400k (1QFY25: 432k) and 650k (1QFY25: 583k) respectively, while iKad order volumes are now at 574k, up from >100k.

• Outlook. FY25 earnings outlook remains healthy on the back of sustained strong demand for its various government-related solutions and margin expansion stemming from ASP adjustments. DSON is also eyeing new projects in auto-gate, foreign passports, and other solutions. The current share price overhang from the absence of contract extensions for both its MyKad and passport-related solutions should ease once the extensions are secured.

• Recent proposed acquisition of 51% equity interest in Innov8tif Holdings from Revenue Group (REVENUE MK, NR) for MYR40m with profit guarantees of MYR2.5m and MYR3m for FY25 and FY26 may look value-destructive on valuation grounds. The implied valuation is 26-31x P/E compared to DSON’s 12-14x. However, DSON believes the acquisition will enhance its digital ID solutions, equipping it with a comprehensive digitalised solution with e-KYC and e-KYB, targeting to expand to a business-to-business-to-consumer environment. Meanwhile, the proposed free warrant of 1-to-2 existing shares to reward shareholders, and resolutions on employees stock option schemes (ESOS) and amendments to the constitution on directors’ written resolutions are slated for voting at its 13 Dec EGM.

• Forecasts and TP maintained on unchanged 20x P/E (at the 5-year mean), inclusive of a 2% ESG premium. Risks: Higher input costs, weaker-than- expected orders, and the non-renewal of contracts.

Source: RHB Securities Research - 29 Nov 2024