Since our non-rated report with FV of RM0.38/share, DNeX’s share price has appreciated by 60%. That said, we believe it has ample growth opportunities and is still undervalued. Hence, we initiate coverage on DNeX with a BUY recommendation and TP of RM0.70/share based on SOP valuation. We like DNeX for its diversified exposure to government projects, coupled with entrepreneur-driven operations. Its government-linked projects such as the National Single Window (NSW) and Vehicle Entry Permit (VEP) provide stable recurring income whereas its entrepreneur-driven foray into the oil and gas (O&G) segment provides significant earnings growth (FY17/18: 22.8%/22.6%) from a low base.

Core Business

DNeX is primarily involved in two major sectors: 1) IT & e-services, where it deals mainly with government projects and 2) energy, where it has exposure in oil and gas production activities and provides services for oil majors. Note that it only recently expanded into the O&G sector, which provided significant earnings growth in FY16.

Investment Thesis

1. Quality O&G field purchase (Anasuria)

2. Resilient earnings from OGPC

3. Sole local player for umbrella contract for directional drilling

4. Stable earnings from NSW system for Malaysian customs

5. Growth from VEP-RC system along borders

6. High margins from rehiring of illegal foreign workers

7. Net cash position, poised to acquire other assets

Key Risks

1. Dip in crude oil price

2. Non-renewal of exclusive NSW service provider contract

3. Earnings dilution from large amount of warrants.

Forecasts

Our earnings forecasts are premised on the following assumptions:

1. Crude oil price USD53/63/63 per barrel in FY17/18/19

2. USD/MYR rate of RM4.25 in-line with our house view

3. Modest trade facilitation revenue growth in-line with GDP growth

4. VEP-RC for the Thai border capex portion will be awarded to the Group

Valuation

We value DNeX based on SOP valuation where we ascribe 24x CY18 PER for its IT earnings and 11x CY18 PER for its O&G ventures. This is roughly in-line with its peers in the IT sector but implies a 19% premium to its O&G peers. We believe the premium is justified given DNeX’s has diversified exposure in both O&M services and cash flow positive brownfields. Thus, we initiate coverage on DNeX with a BUY recommendation and TP of RM0.70/share

Source: TA Research - 25 May 2017