• DNeX continued with its growth strategy by strengthening its IT unit with the Asian Single Window initiative and acquisition of Genaxis albeit both ventures had resulted in rising opex.

• On the Energy division, we expect higher contribution from Ping on higher output at Anasuria as this would offset losses in other energy sub-segment (ie. OGPC and DNeX Oilfield).

• We cut 2019F/20F earnings estimates by 35-36% as we factor in higher opex from the IT unit, delays in OGPC’s delivery of the PCS supply contract and losses at DNeX Oilfield.

• Downgrade to HOLD with lower SOP-derived TP of RM0.29 (from RM0.48) as we assume lower P/E multiple of 10x (from 14x) to reflect earnings uncertainty from its expansion plan.

Rising costs on business expansion

DNeX moves towards strengthening its IT business by setting up the Asian Single Window (ASW) ahead of the liberalisation of Malaysia’s NSW service (ie. UCustoms) in Sep 2019 and acquired Genaxis – an accounting-based consulting firm. The ASW is envisioned as a onestop platform for custom related approval as well as provide DNeX an ASEAN+ platform with presence in China, Thailand, and the Philippines. While we view these initiatives positively, we expect limited earnings contribution in the near term. Acquisition of Genaxis have led to higher overhead costs as we estimate DNeX’s opex had risen 38% yoy to RM54m in 9M18.

Ping to offset weakness in other energy subsegment

OGPC’s portable container system (PCS) installation project has been delayed due to backlogs in site preparation by the main contractor, Petro Teguh. We expect OGPC to deliver only 40 PCS units over 2018 and 2019F compared to 100 units agreed. Meanwhile, DNeX Oilfield remains in the red amidst poor orderbook replenishment and tight margins. Nonetheless, we expect its Energy division to be in the black owing to Anasuria’s contribution (via Ping). Management also expects to receive its maiden dividend from Ping in 2019; proceeds would go towards meeting its rising working capital requirements.

Cut earnings forecast

We lower 2018F by 30% to reflect the poor 9M18 performance and reduce 2019F/20F by 36%/35% (Table 1) to reflect delays in PCS project and higher opex. We expect DNeX’s core PATAMI to grow at 6% CAGR over 2017-20F (from 13%) driven mainly by Ping Petroleum.

Downgrade to HOLD with lower TP at RM0.29

Downgrade to HOLD (from BUY) with lower SOP-derived RM0.29 TP (from RM0.48) (Table 2) as we apply 10x P/E multiple (from 14x) to the IT segment amidst earnings uncertainty from its expansion plan

Source: BIMB Securities Research - 29 Jan 2019