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Malaysia's top midcap performer in merger talks to boost profit

[KUALA LUMPUR] Dagang NeXchange Bhd, Malaysia's best performing midcap stock, is in merger talks for its technology and energy businesses, betting acquisitions will boost its profit growth target to double digits this year.

For its IT unit, Dagang NeXchange is in advanced talks to acquire a company, while negotiations about the energy unit are still preliminary, said Zainal Abidin Jalil, group managing director. More than 80 per cent of the company's revenue was from the IT side last year and the rest was from energy.

"We are a growth company and part of the growth will be via M&A," said Mr Zainal, 58, in an interview at the company's headquarters in Kuala Lumpur. "The biggest potential in terms of growth is going to be the energy side." He declined to give further details.

Dagang NeXchange has risen 195 per cent in the past 12 months, the best performer on the FTSE Bursa Malaysia EMAS Index among stocks worth more than a billion ringgit (S$317.3 million) in market value. The gain has been supported by earnings from the company's foreign vehicle entry payment project and a logistics system for monitoring trade in and out of the country.

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"So far the management has been able to deliver despite the weak environment," said Mohd Shanaz Noor Azam, an analyst at CIMB Investment Bank Bhd., who rates the stock "add" which is equivalent to a buy recommendation.

The company's first-quarter net income announced in May rose 180 per cent to RM15.1 million from a year earlier. It also plans to pay a regular annual dividend, Mr Zainal said. Dagang NeXchange has an indirect stake in the Anasuria oilfield in the North Sea basin, which has contributed to earnings since at least 2016.

OTHER REVENUE STREAMS

Dagang NeXchange wants to expand its electronic vehicle payment system for Malaysia-bound vehicles from Singapore to other countries like Thailand, Indonesia and Brunei.

The company is looking at 15 more potential crossings.  It's also looking at adding services like marine cargo insurance to its logistics services because the company's concession to work with the government expires in the third quarter of 2018.

With the end of the concession in mind, Dagang NeXchange is looking into other energy investments, such as expanding drilling and oilfield services and large scale solar projects, Zainal said.

Despite the stock more than doubling this year, it's traded around 60 sen in a tight range since the beginning of June. Some analysts say any new businesses may have a limited impact on earnings because of the potential expiry of the trade concession.

"It's still too early to tell in terms of execution," said Mohd Shanaz "Investors are still concerned over whether earnings would grow after the expiry of its concession in 2018."

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