This article first appeared in The Edge Malaysia Weekly on March 7, 2022 - March 13, 2022

DATASONIC Group Bhd is set to ride an upward demand for passports as more countries start treating Covid-19 as endemic and reopen their borders as many Malaysians will have to renew their passports.

According to Datasonic managing director Wan Zalizan Wan Jusoh, it is estimated that about four million Malaysian passports have currently expired.

Pent-up demand for travel, be it for business or leisure, will boost the number of passport renewals and issuance of new travel documents.

This will augur well for Datasonic’s earnings, at least for this year. Last November, the e-government service provider was awarded a contract extension by the Ministry of Home Affairs (KDN) for the supply of Malaysian passport chips, passport documents and polycarbonated biodata pages, for a period of 24 months from Dec 1, 2021 to Nov 30, 2023.

The remaining value of the contract is estimated at RM280 million.

Datasonic has also secured a RM50.12 million contract from KDN for the supply of MyKad, MyTentera and MyPoca raw cards and consumables to the National Registration Department for a period of 12 months from Feb 15, 2022 to Feb 14, 2023.

Although international borders have not fully reopened, and many countries still require compulsory quarantine upon arrival, there has already been an increase in the demand for passports since late last year, Zalizan tells The Edge.

“Demand for new passports has certainly increased now compared with September last year. If we compare the demand for new passports in February (last month) against September last year, it has increased more than 200%.

“Prior to the pandemic, we supplied around 200,000 passports a month to KDN. But since most parts of the world were under lockdown in the early part of the pandemic, demand for passports fell 85% then.

“But as our vaccination rates increased and the government started to allow leisure travel and umrah, we have seen demand for passports increase fivefold from the trough level. Now, the [volume we] supply is at around 75% of the number before the pandemic,” he adds.

Many European countries have already reopened their borders to travellers, with no quarantine requirement upon arrival and no proof of negative pre-departure Covid-19 test results required.

Malaysia, too, is looking at relaxing its travel requirements, possibly allowing international travellers to visit the country without having to quarantine. For Malaysians, the list of countries that allow international leisure travel is increasing.

Apart from European countries that are popular with Malaysians such as the UK, France and Germany, countries in the Middle East, the United Arab Emirates, Egypt and Jordan, for example, have already relaxed their requirements for international travellers.

Australia, a major tourism destination for Malaysians, reopened its borders recently to international travellers.

There is no quarantine requirement for fully vaccinated Malaysian travellers entering India effective Feb 15, another popular destination for leisure travel and pilgrimage among Malaysian Hindus.

Meanwhile, Thailand is set to open its land borders with Malaysia this month.

While four million Malaysians are expected to renew their passports, Datasonic’s share price has yet to price in the potential earnings growth.

In a Feb 9 report, BIMB Securities analyst Afifah Abdul Malek expects Datasonic to deliver 2.3 million to three million passports annually between FY2023 and FY2025. She estimates that this will earn Datasonic collective revenue of RM158 million to RM208 million for the three financial years.

Afifah is recommending her clients buy Datasonic with a target price of RM1.05, valuing the company at a price-earnings ratio of 37 times based on an earnings per share forecast of 2.8 sen for FY2023.

“We believe this is fair as we anticipate a strong earnings rebound in the second half of FY2022 due to high demand for passports subsequent to more travel relaxation rules adopted worldwide to boost the tourism industry.

“At the current price level (49 sen on Feb 9), Datasonic offers an attractive buying opportunity to investors given its brighter earnings outlook in near term. We anticipate Datasonic’s earnings to grow at a CAGR (compound annual growth rate) of 141% over FY2021 to FY2024F driven by pent-up demand for passports,” Afifah writes in the report.

Datasonic’s share price has been on the decline over the past two years given its earnings contraction.

Having rebounded from the trough of 26.6 sen in March 2020 after the global equity rout, to a high of 81.6 sen, the stock has been on a downward trend since August that year. It closed at 45 sen last Thursday.

For the financial year ended March 31, 2021, the company’s net profit shrank substantially to RM7.3 million, or 0.28 sen per share, compared with RM60.32 million, or 2.24 sen per share, in FY2020.

Annual revenue declined to RM138.4 million in FY2021 from RM247.5 million the year before. Interestingly, it still declared a dividend, albeit lower, of 1.05 sen per share versus three sen in FY2020.

Datasonic did not fare very well in FY2022 either.

For the first nine months ended Dec 31, 2021 (9MFY2022), it reported a net loss of RM3 million, compared to a net profit of RM12.9 million in the previous corresponding period.

The losses in 9MFY2022 were due to a net loss of RM5.65 million in the first quarter ended June 30, 2021.

According to Zalizan, the losses incurred in the nine-month period were due to the absence of supply of MyKad to KDN throughout 2021, as the commitment for the supply had been met by December 2020.

“So throughout 2021, there were no contributions from the MyKad segment,” he explains.

However, on a quarter-on-quarter basis, Datasonic’s profitability has improved, albeit marginally. In the third financial quarter ended Dec 31, 2021 (3QFY2022), the group’s net profit came in higher at RM1.51 million, compared with a net profit of RM1 million in the preceding quarter ended Sept 30, 2021.

Prior to the pandemic in FY2020, Datasonic’s pre-tax margin was at 26%. This shrank to 8% in FY2021. The forecast for FY2022 ending March 31 is for Datasonic’s pre-tax margin to expand to 16%, according to BIMB Securities’ Afifah.

The spike in passport renewals will give a strong boost to Datasonic’s earnings. However, the heightened demand will not be a long-term pattern as the situation will normalise. This might be a concern that is keeping investors away.

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