• DNeX 2Q17 core profit rose 30% yoy on higher margin from IT services despite marginal revenue growth at 4%. Meanwhile, 1H17 core profit was broadly in-line with our full year forecast at 40% and against consensus’ at 41%.

• IT services is still its bread and butter business while energy segment (excluding Ping) remains in the red dragged by its directional drilling services which offset OGPC’s profits.

• An interim DPS of 0.5sen was declared for 2Q17.

• We see no changes in its fundamentals and upgrade the stock to BUY following the recent share price weakness. Our TP remains unchanged at RM0.60.

IT services remained its bread and butter

DNeX’s 2Q17 core profit grew 30% yoy to RM12.1m driven by the IT and e-Services division. The earnings growth was underpinned by high-margin IT businesses such as operation and maintenance (O&M) business of the VEP and RC system as well as the e-Work permits. At the topline, IT segment revenue weakened but only due to 2Q16 revenue being inflated by progress billing from the installation of VEP and RC system. Meanwhile, revenue for the energy segment grew on recognition of OGPC (acquired in 3Q16) and from directional drilling services.

1H17’s promise delivered, expecting stronger 2H

DNeX’s 1H17 core profits came at RM27.2m which is an 84% yoy growth. This was mainly boosted by O&M of VEP and RC system and associate contribution from Ping Petroleum (Ping). Recall that in 1H16, core associate contribution was only at RM4.1m vis-à-vis 1H17 of RM8.5m. While DNeX’s 1H17 core profit only made up 40% of our full year estimate, we deem this as being in-line and maintained our forecast. We expect a strong pick up in 2H17 from the new contract awarded by Petro Teguh for provision of Portable Container System and the remaining 20% of the VEP installation portion to be billed later this year.

Energy ex-Ping remained bleeding

Despite commencement of new progress billing from oilfield services to Petronas Carigali in 2Q17 and consolidation of OGPC’s results, the energy segment remains loss-making for the sixth consecutive quarters. Nevertheless, this is not unexpected.

Declared interim dividend of 0.5 sen

An interim DPS of 0.5 sen was declared payable on 2 Oct 2017. This is lower than the interim DPS of 1 sen declared for 1Q16.

Upgrade to BUY with unchanged TP at RM0.60

Following recent weakness in its share price, we upgrade the stock to BUY. We believe fundamentals of the company remains and thus our SOP-derived TP of RM0.60 remains.

Source: BIMB Securities Research - 23 Aug 2017