20250529 NexG

Keep BUY, new MYR0.48 TP from MYR0.50, 76% upside, FY26F (Mar) yield. FY25 earnings of MYR110.7m (+22% YoY) exceeded expectations, supported by higher ASPs and i-Kad orders on stronger-than-expected margins. 

We like NexG’s competitive strength in its niche solutions, strong cash flow generation, and potential upside from new project/contract wins at below-mean valuation. We tweak our TP lower after incorporating an updated ESG scoring. 

A beat! FY25 revenue of MYR373.5m (+1.4% YoY), which translated to stronger core earnings of MYR110.7m, was ahead of expectations at 111.9% and 110.5% of our and Street’s full-year estimates. However, no dividend was declared, which came below our expectations. 

YoY revenue was flattish with lower demand for passport and smartcard solutions – this was cushioned by higher ASPs and contributions from the i-Kad segment. The ASP hike, coupled with lower depreciation costs, lifted EBITDA margins by 290bps. 4QFY25 core profit rose 14.7% YoY on stronger demand for DSON’s solutions, but were 12.6% QoQ lower – mainly on lower orders and deliveries. 

Management remains committed towards securing more overseas projects and securing long-term contracts for the current solutions to the Government – this is given DSON’s cost competitiveness and quality of its security documents. Locally, it is targeting more auto gate and IT-related jobs. Separately, DSON plans to develop a new high-security identity document production plant with a capacity of 50m secure identification documents to support its regional expansion. Total capex planned will be at c.MYR250m – to be funded via internal funds, equity fundraising, strategic partnerships, and borrowings.  

Forecasts and ratings. We maintain our earnings forecasts, as DSON’s results were in line, but dial back our dividend forecasts given the change in the new management’s strategy on dividend payments. We also lower the ESG scoring on the governance pillar in view of the recent non-accretive acquisitions. Note: Our TP is lowered to MYR0.48, pegged to an unchanged 20x fully diluted FY26F P/E (at the 5-year mean), inclusive of a 4% ESG discount, as DSON’s 2.8 ESG score is below the 3.0 country mean. We like the group for its competitive strength in its niche solutions, strong cash flow generation, and potential upside from new project wins at attractive valuations.  

Key downside risks: Higher input costs, weaker-than-expected orders, nonrenewal of contracts, and changes in government policies. 

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