Review

• Dagang NeXchange Bhd (DNeX) reported 3QFY18 core net profit of RM10.3mn (-16.4% QoQ, -31.4% YoY). It registered 9MFY18 core net profit of RM38.8mn which accounts for 44% and 56% of ours and consensus’ fullyear estimates respectively.

• We deem the results below our expectations but within consensus, as a bumper 4Q is expected. We note that 1) DNeX Portable Container System (PCS) contract has yet to recognise any revenue and 2) we expect 2 liftings in 4QFY18 for DNeX’s Anasuria field.

• We note that DNeX expects to deliver 50 units of PCS in FY18 valued at circa RM25mn. Although delivery has been delayed due to site readiness issues, DNeX is confident it can meet its FY18 target of 50 units delivered.

• On the other hand, results came in below our expectations as margins for its trade facilitation business fell substantially in 9MFY18. DNeX revealed that this was due to an increase in manpower costs and expenses incurred for business development activities. PBT margin for IT Services fell to 13.3% in 3QFY18 versus 33.4% in 3QFY17. YTD, PBT margin for IT Services is 25.6% versus 34.9% in the same period last year.

• Besides that, we believe costs at the Anasuria field increased after recent completion of a sidetrack well. Thus, associate’s earnings are also trailing our forecasts. That said, associate’s contribution increased by 42.1% QoQ and >100% YoY in 3QFY18 due to higher crude oil price. We expect a bumper quarter for 4QFY18 as two liftings will be carried out versus one in the past 3 quarters.

• No dividend was declared for the quarter under review.

Impact

• We reduce EBIT margins for DNeX’s trade facilitation business from 28% to 20% in-line with recent quarterly results. Furthermore, we also increase costs at DNeX’s Anasuria field from USD40/bbl previously to USD50/bbl. Thus, our earnings forecasts are reduced by 21.9%/21.1%/23.3% in FY18/19/20.

Outlook

• We understand that DNeX is looking to acquire an oil field similar to Anasuria cluster. If this materializes, bottomline would be boosted significantly. Besides that, Ping Petroleum’s (30% owned by DNeX) 2P reserves have increased to 27mn bboe from 23mn bboe following discovery of hydrocarbons at the Avalon oil field.

Valuation

• After the earnings adjustments, we reduce our TP for DNeX to RM0.56/share (previous: RM0.71/share) based on SOP valuation. Reiterate Buy on DNeX.

Source: TA Research - 21 Nov 2018