New contract wins likely for DNeX’s SIC segment

TheEdge Tue, Sep 17, 2019 10:07am - 4 years View Original


Dagang NeXchange Bhd
(Sept 13, 26 sen)
Maintain add with an unchanged target price (TP) of 34 sen:
We attended Dagang NeXchange Bhd’s (DNeX) second quarter of financial year 2019 (2QFY19) results briefing at its headquarters in Cyberjaya, without any surprises. Following the recent increase in tenders, especially for government-related jobs, and after muted tenders in the past 12 months, the group is optimistic about new contract wins in the system integration and consultation (SIC) segment.

DNeX’s national single window (NSW) trade facilitation platform revenue fell 9% year-on-year (y-o-y) for the first half of FY19 (1HFY19), partly due to a 20% drop in traffic volume as a result of a slowdown in global trade. Nevertheless, it is optimistic about a higher contribution in 2HFY19, driven by an expansion in its business-to-business logistic solutions. We expect the NSW to remain a key driver for DNeX, contributing 28% to its revenue for FY19 forecasts.

Its energy division registered a 9% y-o-y pre-tax profit growth for 1HFY19, mainly driven by Ping Petroleum Ltd. Nevertheless, we expect stronger contribution from its trading and services division in 2HFY19, driven by new contract wins such as the automatic tank gauging supply contract from Petroliam Nasional Bhd, slated to start in 3Q19. The group’s drilling division remains a drag, but the management is hopeful that losses could narrow for FY19 forecasts as DNeX is participating in regional tenders worth RM300 million.

The group has hired a consultant for the potential divestment of its entire 30% stake in Ping, estimated to be worth about RM250 million — a 24% premium to Ping’s book value on DNeX’s balance sheet as at end-Dec 18, resulting in a gain of RM208 million or 12 sen per share on the disposal. DNeX shareholders could therefore benefit from a possible special dividend following the disposal.

We maintained our “add” call and sum-of-parts-based TP of 34 sen. We see improving earnings prospects following the NSW contract extension and potential new contract wins in the SIC segment. The stock is trading at 9.4 times calendar year 2020 forecast price-earnings, more than 0.5 standard deviation below its three-year historical mean of 13 times. A potential special dividend from Ping’s divestment and new contract wins are potential rerating catalysts. Widening losses in its energy division and the lack of new contract wins are key downside risks. — CGS-CIMB Research, Sept 12

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