This article first appeared in The Edge Financial Daily on March 19, 2018

Dagang NeXchange Bhd
(March 16, 43.5 sen)
Maintain add with an unchanged target price (TP) of 71 sen: We met Dagang NeXchange Bhd’s (DNeX) management last Thursday to discuss its fourth quarter of 2017 (4QFY17) results and FY18 outlook. The group remained bullish on delivering a stronger earnings growth in FY18 on the back of potential earnings contributions from its acquisition of Genaxis, an extension of its National Single Window concession, and a higher completion of its portable container system (PCS) project by OGPC Sdn Bhd. Overall, the group is looking to leverage its expertise in information technology services and energy to grow additional revenue streams.

Management expects an immediate earnings contribution from Genaxis upon completion of its acquisition in 2QFY18. To recap, DNeX is acquiring a 51% stake in Genaxis, a consulting firm that delivers training and consulting services to the public and private sectors for RM10 million cash. Genaxis also has a 61% stake in Innovation Associates Consulting (IAC), the largest SAP distributor in Malaysia and a contractor for the accrual accounting system for the federal government. IAC has an outstanding order book of over RM200 million.

In addition, the group expects OGPC to recognise a higher sales and earnings contribution from the PCS contract in FY18, following a disappointing completion in FY17. DNeX targets to deliver at least 50 units of PCS in FY18 (versus seven units in FY17). Moreover, the group expects its loss-making DNeX oilfield services to be profitable in FY18, driven by a new equipment leasing contract with Baker Hughes.

Apart from that, we also expect a stronger profit contribution from DNeX’s 30%-owned associate Ping Petroleum in FY18, driven by an improving crude oil price outlook and additional crude lifting for its Anasuria field due to the absence of a major maintenance shutdown. We also understand that Ping is exploring potential asset acquisitions to drive new growth.

The stock trades at 10.5 times FY19 forecast (FY19F) price-earnings ratio (PER). The stock has fallen almost 16% year to date. We see the pullback in its share price as offering an attractive buying opportunity given that the stock currently trades at an attractive 10.5 times FY19F fully diluted PER, below its five-year mean PER of 12 times. We expect DNeX to record a robust FY17 to FY20F net profit compound annual growth rate of 15%, driven by resilient earnings growth in both its IT services and energy segments.

We make no changes to our earnings forecasts and maintain our “add” rating on the stock, with an unchanged sum of parts-based TP of 71 sen. We see the completion of the Genaxis acquisition, the award of new vehicle entry permit (VEP) and road charge (RC) contracts, and higher crude oil prices as potential rerating catalysts for the stock. Key downside risks to our “add” call are lower crude oil prices, and delays in new VEP and RC contract awards. — CGSCIMB, March 15