INVESTMENT MERIT

Following our Trading Buy call on DNEX last month, its share price had rallied 17% and approached our fair value of RM0.28 pegged to 10.0x FY17E PER. While we believe the positives have been fairly priced-in and with no change in our earnings estimate, we advocate investors to Take Profit (from Trading Buy) and re-visit the stock as new opportunity arises. Approaching our fair value. We issued a “Trading Buy” call on DNEX with a fair value of RM0.28 with the report titled “Widening Earnings Base” on 7th December 2016. DNEX had garnered traction and surged 17% to RM0.27 partially backed by advance in oil prices after OPEC and non-OPEC members agreed to trim oil production, due to direct correlation to its associate Ping Petroleum’s earnings.

Stable bread and butter business. Recall that DNEX has successfully extended beyond its core business, National Single Window (NSW), the trade facilitation system to expedite paperless custom clearance process with the successful two-year extension until September 2018 from the government. This allows DNEX to prolong its exclusivity for another two years before switching to uCustoms under a new framework to allow users to choose their preferred service providers.

2017 is the year of delivery. DNEX is on track to widen its earnings base through the maiden earnings from the new acquisition of OGPC, an oil and gas services provider, apart from its IT and e-services earnings. Additionally, its 30% owned associate, Ping Petroleum, is expected to generate earnings from the 50%-owned Anasuria cluster. The field is currently producing 6.4k bbl/day and with an operating cost of c. USD23/bbl. Our sensitivity analysis suggests that every USD5/bbl increase in oil prices will lead to RM3m-5m upside in FY17E earnings projection.

Keeping earnings projections. We are keeping our DNEX’s FY16-17E earnings at RM32.9m and RM48.5m, respectively assuming: (i) steady earnings from OGPC, and (ii) associate income from the Anasuria cluster. Further upside could be seen if oil prices exceeded our FY17E average forecast of USD55/bbl.

Take Profit. Following the share price rally, DNEX is currently trading at 10x FY17E PER, which we deem as fair despite higher than small-medium sized oil and gas peers of 7-9x due to its: (i) superior net margins of 20-22%, and (ii) net cash position. Thus, we advocate investors to lock in profit for now and re-accumulate on price weakness later should such opportunity emerges. We might revisit the stock again should there be any new positive catalysts. Do take note that our calculations of EPS exclude conversion of warrants given that its exercise price is at 50.0 sen/share.

Source: Kenanga Research - 9 Jan 2017