CIMB Equities Research is retaining its add call for Dagang NeXchange (DNex) but with a lower target price (TP) of 53 sen.
KUALA LUMPUR: CIMB Equities Research has downgraded Dagang Nexchange
(DNeX) to Hold with a lower sum-of-parts based target price of 40 sen from 60 sen.
“We see a challenging outlook for the group in FY19 in view of the declining crude oil price, weak recovery in oil & gas activities and a decline in the National Single Window's (NSW) trade facilitation transaction volume after the expiry of its concession in Aug 2019,” it said on Wednesday.
However, new marine fibre contract wins and higher crude oil prices are potential re-rating catalysts.
CIMB Research said DNeX 9M18 core net missed expectations at 54%/67% of its/consensus FY18F estimates due to weaker-than-expected earnings from the energy division.
“We cut our FY18-20F EPS by 22-30% for lower energy division contribution and higher opex from new marine cable and accrual accounting projects,” it said.
DNeX posted a on-quarter higher core net profit of RM9.2m in 3Q18 after excluding RM3.6m impairment loss on goodwill, vs. RM8m core net profit in 2Q18.
The group attributed the on-quarter increase in earnings to narrowing losses from the energy division and higher earnings from its 30%-owned associate Ping Petroleum (Ping) on the back of higher crude oil prices.
Revenue in 3Q18 rose 24% on-quarter mainly due to maiden contribution from submarine cable installation and repair project in Indonesia.
As for the nine-month results, revenue in 9M18 surged by 30% on-year to reach RM185.6m, driven by higher contribution from Genaxis and submarine cable installation project.
Nevertheless, energy division revenue fell by 20% on-year due to weak recovery in domestic oil & gas activities.
As a result, the group reported a wider operating loss for its energy division. Moreover, DNeX also incurred higher depreciation expense and minority interest following the consolidation of Genaxis.
Overall, the group’s core net profit fell by 18% on-year to RM34.7m.
CIMB Research said the OGPC and DNeX Oilfield Services continue to face intense competition and margin pressure in the energy division due to soft market conditions. Hence, we expect these operating energy units to record wider losses in FY18F.
"Despite these setbacks, DNeX is poised to benefit from stronger contribution by Ping. Ping recorded 69% on-year pretax profit growth in 9M18, driven by higher sales volume and crude oil prices.
“We cut our FY18-20F EPS by 22-30% to account for lower contribution from the energy division following lack of new contract wins and delays in the implementation of the portable container system (PCS) project.
"We also raise our opex assumptions to reflect start-up costs for the submarine cable installation and accrual accounting projects,” it said.
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