Review

• Dagang NeXchange Bhd (DNeX) registered 9MFY17 core net profit of RM42.1mn (+57.8% YoY) which came at 66% and 69% of ours and consensus’ full year estimates respectively.

• We deem this within expectations as we are expecting a spectacular 4Q underpinned by 1) better average crude oil price coupled with higher utilisation of Anasuria FPSO after scheduled turnaround, 2) one-off final payment of RM9mn from Malaysia-Singapore VEP-RC capex contract and 3) more deliveries of portable container systems to Petro Teguh.

• 3QFY17 core net profit increased 24.9% QoQ and 14.0% YoY to RM14.9mn on the back of 1) higher contributions and better margins in the IT segment and 2) EBIT level turnaround at Energy segment despite the decline in revenue.

• IT segment revenue improved due to higher contributions from the eWork permit, trade facilitation and VEP-RC businesses. However, revenue from energy declined as progress billing from Petronas Carigali slowed down.

• Associate contributions, i.e. Anasuria cluster improved 11.1% QoQ but fell 34.6% YoY. As mentioned, the scheduled turnaround in September did not impact earnings as seen from the QoQ increase. For the YoY decline, we understand that this was due to reopened sour wells resulting in a surge of production during the last 2 quarters of FY16.

• 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, 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, there may be other applications for its RFID (radio frequency identification) technology such as multiflow lanes.

Valuation

• Our TP remains unchanged at RM0.75 based on SOP valuations. Maintain BUY on DNeX as in our opinion, it expanded into the O&G sector at the right time.

Source: TA Research - 22 Nov 2017