KUALA LUMPUR: CIMB Equities Research has initiated coverage of Dagang Nexchange
(DNeX) with an Add rating and sum-of-parts (SOP) based target price of 72 sen.
It said on Friday that in its view DNeX is a proxy for the government’s plan to roll out vehicle entry permit and road charges (VEP & RC) at Malaysian borders.
“DNeX trades at 16 times FY18F P/E, above historical five-year mean of 15 times but is still attractive, given our strong FY16-19F EPS CAGR projection of 16%.
“VEP & RC contract awards and higher crude oil prices are potential re-rating catalysts. Key downside risks are lower crude oil prices, decline in National Single Window (NSW) transaction volume post-expiry and delay in VEP & RC contract awards,” it said.
CIMB Research said DNeX is the exclusive operator of the NSW platform, which provides trade facilitation services to the Customs Department.
“We expect NSW to remain a key earnings driver, fuelled by rising transaction volume from the business-to-business (B2B) segment,” it said.
Although the government’s transaction volume is expected to drop following the expiry of the platform’s exclusivity in 4Q18F, DNeX expects to retain its B2B segment transaction volume due to increase in platform stickiness driven by new value-added services.
To recap, in 2016 and Jan 2017, DNeX was awarded two contracts worth RM149.3mil to develop, install and maintain the VEP & RC system and equipment for five years at the Malaysia-Singapore border in Johor.
“We believe DNeX stands to benefit from the government’s plan to roll out similar projects at the remaining 15 crossing points to Malaysia. We expect the Malaysia-Thailand border VEP & RC contract to begin in 2018F. Overall, we project VEP & RC services to contribute 12%-16% of the group’s FY17F-18F pretax profit,” it said.
DNeX had also embarked on a new oil and gas venture by completing the acquisition of OGPC for RM170mil in 2Q16.
The group expects stronger profit contribution from OGPC in FY17F18F, driven by a pick-up in oil and gas activities following higher average crude oil prices and potential new contracts.
DNeX was the only local service provider awarded a three-year drilling and services contract by Petronas Carigali in 2016.
In 2Q16, DNeX also invested US$10mil (RM42mil) to acquire a 30% stake in Ping Petroleum (Ping), an upstream oil and gas service provider with a 50% stake in the producing Anasuria cluster in the North Sea.
The investment amount implies low entry cost of below US$2 per barrel (historical average for comparable transactions). The group projects RM22mil-RM25mil associate profit contribution from Ping in FY17F-18F, based on US$50 per barrel crude oil price.
“We expect DNeX to record a robust FY16-19F net profit CAGR of 16%, driven by resilient earnings growth in both the IT services and energy segments.
“However, we expect the energy division to record faster growth of about 19% per annum, driven by new contracts from OGPC, DOS and Ping (vs. 13% growth for the IT division). Hence, we expect net profit contribution from energy division to grow from 52% in FY16 to 58% in FY19F,” it said.
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