KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB Research) remains cautious about Dagang NeXchange Bhd (DNeX), as its business unit, SilTerra Malaysia Sdn Bhd, has not yet shown a clear recovery.
The firm noted that SilTerra remained in the red, likely because of the continued subdued utilisation rate (approximately 60 per cent based on its estimates) resulting from the tepid shipment of its core technology.
"We also understand that SilTerra is still struggling to firm its average selling price (ASP) given its intention to retain customers via short-term discounts to capitalise on order recovery when the upcycle arrives.
"We take the view that the recovery will only occur from the second half of 2024 (2H24) onwards when its utilisation rate improves to approximately 70 per cent to 75 per cent – leading to breakeven or minor profitability," it said in a note.
Meanwhile, with oil prices hovering above US$80 per barrel, HLIB Research expects contributions from DNeX's energy segment to stay resilient.
The firm said it looks forward to the reactivation of the Abu Cluster, which has an estimated net production of 2,500 barrels per day at 100 per cent interest, with the first oil expected by early 2025.
It highlighted that DNeX's business unit, Ping Petroleum UK PLC, currently has a net daily production of about 2,000 barrels per day.
On that note, HLIB Research has maintained a "hold" call on DNeX, pending clearer signs of rebound in SilTerra's operating performance.
It has also raised the group's target price to 43 sen from 38 sen previously.
Meanwhile, HLIB Research also pointed out that the recent news flow of DNeX being a potential National Integrated Immigration System (NIISe) project winner has bolstered its share price performance.
It said with HeiTech Padu Bhd out of the picture as per the news report, the shortlisted candidates for the NIISe project are narrowed down to DNeX and Theta Edge Bhd.
"We understand the multi-year contract will be valued at approximately RM1 billion, and the outcome will likely be unveiled by the end of June.
"Should DNeX be able to secure the project? We view this potential contract win as an earnings catalyst for its IT segment, although net earnings potential remains fluid as DNeX may form partnerships with other parties to execute the project," it added.
For the first quarter ended March 31, 2024 (1Q24), DNeX recorded core earnings of RM19.6 million, aligning with HLIB Research's estimates at 24 percent of its financial year 2024 (FY24) forecast.
The group's 1Q24 core net profit arrived after adjusting for forex loss (RM3.9 million), impairment on receivables (-RM2.2 million), and reversal of property, plant, and equipment (PPE) impairment (-RM0.9 million).
Core net profit was up eight per cent attributed to better group operating profits, which stemmed from narrowing SilTerra operating losses to -RM6.3 million from RM14 million in 3Q23.
Meanwhile, DNeX's core bottom line returned to the black of RM19.6 million as the group's IT segment turned around with a profit before tax of RM9.7 million.
This was due to the significantly higher contribution from Subsea Telco resulting from the completion of its work repair projects.
