Review

• Dagang NeXchange Bhd (DNeX) reported 1QFY18 core net profit of RM16.3mn (+11.2% QoQ, +7.0% YoY), which was within ours and consensus’ expectations, accounting for 23% of both full-year estimates.

• We note that earnings growth was driven by the IT services segment, as revenue from trade facilitation services grew and contributions from the recent acquisition of Genaxis and Innovation Associates Consulting (IAC) kicked-in.

• To recap, DNeX purchased 51% stake in Genaxis for RM10mn and 60% stake in IAC through Genaxis for RM23.8mn. We note that IAC is currently the contractor for the Government Financial and Management Accounting System.

• On the other hand, revenue from the energy segment was lacklustre as the Group’s portable container system (PCS) installation was delayed yet again due to site readiness. Nevertheless, the delay is not expected to reduce total revenue recognised from this contract.

• Associates contribution increased 35.4% YoY but declined 34.0% QoQ. The former was due to higher crude oil price, whilst the latter is likely due to overflow from 3QFY17 as a result of maintenance activities.

• No dividend was declared for the quarter under review.

Impact

• Maintain earnings forecasts.

Outlook

• We understand that DNeX is looking to acquire an oil field similar to Anasuria cluster. If this materializes, bottomline would be boosted significantly. DNeX is in an ideal position to acquire new assets given its low net gearing of 0.1x 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 loss of revenue from the expiration of its NSW monopoly in end-FY19.

Valuation

• Our TP is increased to at RM0.73 based on SOP valuations after rolling forward our valuation base year to CY19. Maintain BUY on DNeX as it directly benefits from the increase in crude oil price. Furthermore, recurring income from government-linked contracts should cushion any downside risk.

Source: TA Research - 25 May 2018