This article first appeared in The Edge Financial Daily on September 29, 2017

Dagang Nexchange Bhd
(Sept 28, 47.5 sen)
Maintain add call with a revised target price (TP) of 74 sen: We met with Dagang Nexchange Bhd’s (DNeX) management on Wednesday to discuss the group’s first half ended June 30, 2017 (1HFY17) results and outlook for 2HFY17. We left the meeting feeling cautious on DNeX’s near-term outlook due to a soft market environment and margin compression in the oil and gas segment. However, it maintained its 30% revenue and 20% net profit growth forecast in the financial year 2017 (FY17) on the back of new recurring income in the IT division and full-year profit contribution from Ping Petroleum.

The group highlighted that pre-tax profit from the IT division surged 35% year-on-year (y-o-y) to RM22.3 million in 1HFY17, driven by growth in its trade facilitation business and new recurring income from operation and maintenance of the vehicle entry permit (VEP) and road charge (RC) system. Meanwhile, the energy division’s pre-tax losses (excluding Ping) narrowed to RM2.9 million in 1HFY17 versus RM4.1 million in 1HFY16 due to higher utilisation at the DNeX Oilfield (DOS).

Ping recorded a RM8.5 million associate profit contribution in 1HFY17 mainly due to higher average crude oil prices. There was no y-o-y comparison in 1HFY16, as the 30% stake acquisition in Ping was only completed at end of the 2Q16. Management expects lower production volume from Ping due to a fall in crude oil lifting from five times in 2016 to four times in 2017. However, the group still expects a stronger 2HFY17 contribution (versus 1HFY17) from Ping due to higher average crude oil selling prices of US$56(RM236.9)/barrel year to date (versus US$45/barrel in FY16).

We cut our FY17 to FY19 forecast earnings per share by 6% to 10% to account for weaker earnings from OGPC Sdn Bhd and DOS, but still expect stronger earnings delivery in the 2HFY17 driven by: i) 20% recognition of the portable container system contract of RM75 million; ii) the remaining 20% VEP and RC system portion for the Johor-Singapore crossing; and iii) stronger contributions from Ping. Overall, we project DNeX to record a robust FY16 to FY19 forecast net profit compound annual growth rate (CAGR) of 17%, driven by resilient earnings growth in both its IT services and energy segments.

Based on our channel checks, the alternative system which was supposed to have replaced DNeX’s National Single Window (NSW) platform on Sept 18 could be delayed due to integration issues. Hence, we see potential for the NSW platform exclusivity contract to be renewed or extended. Apart from that, the group is also exploring possible monetisation of its radio frequency identification tags system that is suited for applications in transport and logistics areas, such as multi-flow lanes.

Following our earnings revision, we lower our sum-of-parts based TP to 74 sen as we roll over our valuation to end 2018. New contracts for VEP and RC systems, extension of NSW platform exclusivity and higher crude oil prices are potential rerating catalysts for the stock. Key downside risks to our call are a decline in NSW transaction volumes post exclusivity expiry in September next year and delays in the VEP and RC contract awards. — CIMB Research, Sept 27