Review

• Dagang NeXchange Bhd (DNeX) registered 1H17 core net profit of RM27.0mn (+99.0% YoY), which constitutes 42% and 40% of ours and consensus’ earnings forecast. We deem this within expectations as the Group’s results will be back end loaded given 1) contract from Petro Teguh to supply PSC units was only secured in July-17, and 2) final payment for Singaporean VEP-RC capex in 4Q17.

• However, this will be partly offset by lower contribution from Anasuria given a planned turnaround at its production facility for 21 days in 3Q17. Production is expected to be temporarily halted for circa 21 days, with likelihood of heavy capex costs.

• 1H17 PBT and headline net profit fell 69.9% and 71.5% YoY respectively due to a chunky one-off negative goodwill gain recognized in 2Q16. To recap, this was underpinned by acquisition of Anasuria by DNeX’s associate, Ping Petroleum.

• 2Q17 core net profit was lower by 20.9% QoQ due to 1) lower margins from IT services, 2) lower contribution from Anasuria and 3) higher taxes. Note that average oil price was lower in 2Q17 at USD50/bbl (1Q17: USD54/bbl). Furthermore, DNeX utilised tax benefits amounting to RM1.4mn in 1Q17.

• That said, revenue grew by 12.1% QoQ and 3.6% YoY due to 1) mini contract wins from Petronas Carigali’s umbrella contract for directional drilling, and 2) full quarter contribution from eWork permit operations.

• DNeX declared interim dividend of 0.5sen per share, which implies dividend payout of 32% in 1HFY17.

Impact

• Maintain earnings forecasts.

Outlook

• We understand that DNeX is looking to acquire a similar oil field to Anasuria cluster. If this materializes, bottomline would be boosted 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 for 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 industry expertise. Additionally, going forward, there will be additional border crossings in Brunei and Indonesia where this system can be implemented.

Valuation

• Our TP remains unchanged at RM0.76 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 government-linked contracts should cushion downside risk.

Source: TA Research - 23 Aug 2017