• DNeX 3Q17 core profit fell 17% qoq and 31% yoy on higher effective tax rate and weak earnings from energy segment. Overall, 9M17 core PBT of RM43.4m came in lower than ours and consensus FY17 estimates at 55% and 52% respectively.

• IT services sales remained in growth a trajectory, rising 18% qoq with PBT margin expanding to 33.8% (2Q17: 26.1%).

• We reduced our earnings forecast for FY17 and FY18 by 14% and 12% respectively accounting for the poor performance of the energy ex-Ping segment.

• We see the recent plunge in share price was overdone. BUY with a lower SOP-derived TP of RM0.52 (prev TP: RM0.55).

Energy ex-Ping dragged overall performance

DNeX’s 3Q17 core profit dropped 17% qoq and 31% yoy to RM10m on higher effective tax rate and weaker performance from its energy segment. Excluding a one-off other income item of RM5m for being the industry grant awarded to its oilfield drilling services unit, the segment sank in the red for the seventh consecutive quarters. Overall, its 9M17 core PBT came in below ours and consensus estimate at 55% and 52% respectively.

IT segment performance encouraging

DNeX posted healthy growth in its IT segment with revenue growth of 18% qoq and 39% yoy to RM37.3m. It was mainly driven by its NSW business, e-Work permit as well as recurring income from the operation and maintenance of the VEP and RC system. Its PBT margin also expanded to 33.8% from 26.1% in 2Q17. Moving into 4Q17, we expect stronger result from this segment as it recognises the remaining and final 20% (equivalent to RM9m) of the capex portion of VEP and RC system.

Lower earnings forecast

We pare down our FY17 and FY18 earnings estimates by 14% and 12% respectively. This is to factor in the poor performance of the energy ex-Ping segment. This is despite expectations of a lumpy 4Q17 from OGPC’s contract to supply PCS to Petro Teguh.

Maintain BUY call with lower TP at RM0.52

In view of the 7 consecutive quarters of disappointment, we have taken prudent approach to ascribe zero value to the energy ex-Ping segment. We reckon it would remain in the red given the tough outlook for the O&G services segment. We lower our TP to RM0.52 (prev TP: RM0.55) using SOP methodology. Nevertheless, we believe recent share price weakness offers a good buying opportunity. Maintain BUY.

Source: BIMB Securities Research - 22 Nov 2017