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Earnings recovery, job wins expected for DSONIC (5216) Datasonic Group Bhd

Datasonic Group Bhd
(Aug 5, 71.5 sen)
Maintain buy with a higher target price (TP) of 82 sen: Datasonic Group Bhd’s first quarter of financial year 2020 (1QFY20) earnings likely to improve year-on-year (y-o-y) and quarter-on-quarter (q-o-q) with MyKad orders resuming and the commencement of supply for financial cards and chip modules in Indonesia. We raised our FY20 forecast (F) TP-earnings (P/E) to 19 times or +0.5 standard deviation (SD) from 18 times as we believe the interest will remain strong in view of an expected earnings recovery and potential job wins or news flow in the near future.

With 1QFY20 likely to be brighter with double-digit y-o-y and q-o-q earnings growth, due to the resumption of MyKad orders to about 600,000 per quarter, while orders for passport-related solutions are expected to be stable. Its growth resumption is expected after a forgettable FY19, dragged by the absence of MyKad orders as the new Pakatan Harapan government was cautious about spending and inventory levels. Results for 1QFY20 should be released on Aug 30.

We are expecting a 47% y-o-y earnings growth in FY20 following a low base in FY19 of -42%. Datasonic’s earnings growth should be anchored by the resumption of MyKad orders (only 200,000 were delivered in FY19); its total outstanding order book of RM772 million; supply commencement for financial cards and chip modules in Indonesia; and potential new job wins. The resumption of MyKad orders is expected to continue, and stabilise at about 500,000 to 600,000 per quarter given the optimal inventory level of below two million pieces at Jabatan Pendaftaran Negara.

Apart from participating in the request-for-proposal for the Integrated Immigration System, we understand it is also contending for other projects such as the Public Key Directory and Public Key Infrastructure-related solutions, foreign workers, e-visa, driving licence, auto-gate maintenance, as well as an extension for the MyKad contract up to November 2019.

We maintained our forecasts but raised our FY20F target P/E to 19 times (+0.5 SD) from 18 times as we believe the stock will still draw interest with improved sentiments after clinching a contract extension recently, and we expect more job wins in one to two months. Overall, FY20F is expected to see a recovery, anchored by a strong order book of 3.5 times of FY19’s revenue, the resumption of orders for MyKad, and potential contract wins. Key downside risks include a slowdown in MyKad orders, discontinuation of contracts, and fluctuations in orders for passport. — RHB Research Institute, Aug 5

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