Review

• Dagang NeXchange Bhd (DNeX) registered FY17 core net profit of RM56.7mn (+14.8% YoY), which came in below ours but within consensus expectations constituting 93% and 99% of estimates respectively.

• The earnings miss was mainly due to lower-than-expected margins in 4QFY17. Note that revenue was broadly in-line with expectations accounting for 97% of our estimates. We believe the lower EBIT margin of 15.2% (3QFY17: 29.5%) was due to the last payment from the VEP-RC contract which we understand attracts lower margins.

• FY17 revenue grew 14.3%, translating to growth in net profit of 14.8%. The growth is attributed to: 1) full consolidation of OGPC’s results, 2) progressive billing of the directional drilling contracts, and 3) opex portion of the VEP-RC contract. This was partly offset by lower recognition of VEP-RC capex portion and a one-off JKR system integration project.

• Associate contributions, i.e. the Anasuria cluster improved 104.4% QoQ but fell 59.8% YoY. Higher crude oil price recognised in 4QFY17 (circa USD59/bbl) compared to 3QFY17 (circa USD50/bbl) likely contributed to the massive QoQ growth. 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. Furthermore, there was a downward revision of supplementary charge rate at Ping Petroleum in 4QFY16 resulting in a one-off gain.

• We expect associates contribution to grow substantially in FY18 as the completion of the major turnaround at Anasuria FPSO should increase utilisation rate and boost production levels. This, coupled with production enhancement activities, i.e. gas lift and reopening of sour wells should allow Anasuria to reach its peak production.

• No dividend was declared for the quarter under review which was a surprise. We had previously expected a dividend of 0.5 sen to be paid in 4QFY17.

Impact

• Maintain earnings forecasts pending an analysts’ briefing in March.

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.

• We believe DNeX’s 1Trade system, Malaysia’s first one-stop portal for total cargo and trade management is the future. As various multinational companies have begun utilising DNeX’s system, it will be able to more than

offset any revenue lost from the expiration of its NSW monopoly in endFY19.

Valuation

• Our TP remains unchanged at RM0.72 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 any downside risk.

Source: TA Research - 28 Feb 2018