Review

• Dagang NeXchange Bhd (DNeX) registered 1Q17 core net profit of RM15.1mn (-33.6% QoQ, +>100% YoY), which was within our estimates at 25% of full year forecast. The significant growth from 1Q16 was due to 1) expansion into the O&G business and 2) new contributions from VEPRC and e-work permit.

• Revenue grew 63.0% YoY in 1Q17 due to consolidation of OGPC’s revenue and steady growth in the NSW project. Besides that, the opex portion of VEP-RC system further boosted revenue. However, revenue declined by 34.9% QoQ as there was a lumpy recognition of VEP-RC capex payment (RM17.0mn) in 4Q16.

• Recall that OGPC was only acquired in 2H16 whereas the opex portion of Singapore VEP-RC was only awarded in Jan 2017. According to management there is an additional RM8.5mn to be recognised for the capex portion of the Singapore VEP-RC in FY17.

• Associates contribution declined significantly QoQ as there were some tax credits obtained by Ping UK from the UK government amounting to RM23.5mn in 4Q16. As we expect crude oil price to increase going forward, we expect associates contribution to improve in the following quarters.

• Margins were significantly better in 1Q17 as compared to previous quarters as there was the introduction of new e-work permit services. As mentioned in our initiation report, we opine that margins are rather lucrative for this service given DNeX’s existing infrastructure and technical expertise.

• We note that tax rate for 1Q17 was lower at 7.1% compared to 4Q16: 13.1% and 1Q16: 25.4%. This was mainly due to utilisation of tax benefits amounting to 1.4mn.

• No dividend was declared for the quarter under review.

Impact

• Maintain earnings forecasts.

Outlook

• We understand that DNeX is looking to acquire a similar oil field to Anasuria cluster. If this materializes, this would boost bottomline significantly. DNeX is in an ideal position to acquire new assets given its net cash position and robust free cash flow.

• There is huge growth potential from the VEP-RC system going forward. We believe DNeX is the frontrunner to secure the capex and opex portion for the Thai border given its expertise in the industry. Going forward, there will be additional border crossings in Brunei and Indonesia where this system can be implemented

Valuation

• Our TP remains unchanged at RM0.70 based on SOP valuations. Maintain

BUY on DNeX as in our opinion, it expanded into the O&G sector at the right time. Furthermore, recurring income from its government-linked contracts should cushion any downside risk.

Source: TA Research - 25 May 2017