This article first appeared in The Edge Financial Daily on July 13, 2018
Dagang NeXchange Bhd
(July 12, 38 sen)
Maintain add with an unchanged target price of 64 sen: The Malaysian Competition Commission (MyCC) has proposed a RM17.4 million penalty against Dagang Net Technologies (Dagang Net), a wholly-owned subsidiary of Dagang NeXchange (DNeX), for infringing the Competition Act 2010.
MyCC said in its press statement that Dagang Net has allegedly abused its position as a monopoly in the provision of trade facilitation services under the National Single Window (NSW), by refusing to supply electronic mailboxes to end users of the Sistem Maklumat Kastam and also imposing barriers to entry to the extent of preventing competition.
MyCC highlighted that it had carried out an investigation on Dagang Net following complaints received by the commission, and MyCC found that Dagang Net had abused its position by refusing to supply new and additional electronic mailboxes to end users who utilised front-end software from software solutions providers that were not considered to be Dagang Net’s authorised business partners.
MyCC also said that Dagang Net had imposed an exclusivity clause on its business partners that would have distorted competition in an upcoming market by creating barriers to entry.
Dagang Net will have 30 days to appeal to the commission before it makes the final decision on the amount of the potential fine.
The news is a negative surprise to us. We estimate that DNeX’s net profit in financial year ending Dec 31, 2018 (FY18) could fall by 24% if it incurs the RM17.4 million one-off penalty from MyCC.
However, we understand that the group is looking to file an appeal on the matter.
In December 2017, DNeX was awarded a one-year extension for the NSW concession that will allow it to remain as the exclusive operator of the NSW platform until end August 2019, which was the third concession extension received by DNeX.
We project the NSW concession to contribute about RM100 million or 39% of the group’s revenue in FY18. The group expects the revenue contribution from NSW to decline by 30% to 35% once the government decides to open the trade facilitation service market following the expiry of the NSW from September 2019.
The risk of lower contribution from NSW is not a new issue given that the group has always been transparent with the investment community about the potential concession expiry and the need for the group to reduce its dependency on the NSW platform by adding new businesses to its portfolio, such as the recent acquisition of Genaxis and its strategy to diversify in the energy division.
Nevertheless, we do see bigger downside risks to earnings contribution from NSW if DNeX fails to appeal against the penalty.
Our FY19 forecast already reflects the potential four-month drop in NSW concession revenue post expiry in September 2019, but the full-year impact will only be reflected in FY20.
We make no changes to our earnings forecasts pending the appeal by the group and final decision by MyCC.
We see higher crude oil prices and stronger earnings from its IT division as potential rerating catalysts.
Key downside risks to our “add” call are lower crude oil prices, a decline in the NSW’s trade facilitation transaction volume post the expiry of its concession in September 2019, and delays in the implementation of portable container system projects. — CGSCIMB Research, July 12