• DNeX 1Q17 core profit grew 18% yoy and 21% qoq mainly due to structural boost from IT segment. Overall, 1QFY18 core earnings of RM17.7m were inline with ours and consensus’ estimate at 28% and 26% respectively.

• IT services pretax profit almost doubled to RM25.3m yoy due to of 51% stake in Genaxis and 60% of Genaxis’ subsidiary, the Innovation Associates Consulting (IAC).

• Delay of PCS delivery and weaker contribution from Ping led to sequential decline in pretax profit of the energy segment.

• We maintain our BUY call with an unchanged TP of RM0.52. We see its selective M&As including Genaxis and IAC will further enhance its position in e-government space.

Core earnings growth remained intact

After adjusting for impairment on inventory losses worth RM1.2m, DNeX’s 1Q18 core earnings grew 18% yoy and 21% qoq to RM17.7m, driven by acquisition of Genaxis boosting its IT segment. Overall, 1Q18 core earnings were inline with ours and consensus’ estimates at 28% and 26% respectively.

Enhancing IT segment through acquisition

The pretax profit of the IT segment grew significantly to RM25.3m (1Q17: RM14.1m; 4Q17: RM8.8m) following consolidation of Genaxis. Recall that DNeX acquired 51% stake in Genaxis and 60% of its subsidiary (i.e. Innovation Associates Consulting) on 25 Jan 2018 for a total sum of RM33.7m.

Energy segment turned weaker

On quarterly basis, pretax profit of the energy segment eased to RM4.3m (4Q17: RM9m) due to weaker results from both Ping and ex Ping business segments. The ex-Ping pretax losses widened to RM1.8m (4Q17 LBT: RM0.2m) as revenue fell 41% to RM11.8m (4Q17: RM19.9m) amidst delay in delivery of portable container system (PCS) at select fisherman ports. Management attributed the delay to site readiness and local authorities’ approval. Recall that in 4Q17, the PCS business contributed RM3.8m of revenue. Meanwhile, contribution from Ping declined further to RM6.1m (4Q17: RM9.2m) despite potentially benefitting from higher realised crude oil prices.

Maintain BUY with unchanged TP at RM0.52

We maintain our BUY call on the stock with unchanged TP of RM0.52, derived using SOP methodology. We think the combination of various expertise through acquisition exercise (such as Genaxis and IAC) would benefit DNeX and enhance its position in e-government space going forward.

Source: BIMB Securities Research - 25 May 2018