Highlights

• IT software solutions provider. Primarily a software solutions provider, the group’s core business is still being anchored by its bread and butter National Single Window (NSW) which has seen its contract being renewed by the government for another 2 years.

• Bagged lucrative VEP business. DNEX is looking to potentially increase its IT earnings base significantly by providing the Vehicle Entry Permit (VEP) in the Johor- Singapore border with 2 major revenue streams: CAPEX (RM45m) and OPEX maintenance (RM20 p.a.) with doubledigit margins expected. If the project is successful, the VEP software solution could be scaled to be applied on Thailand- Malaysia border also which could bring about additional income streams.

• Making ‘Energy’ its 2nd core business. Despite possessing a stable IT business, the group is not resting on its laurels by investing in Energy business through rights issue and special share issuance. To bring in experience, the group has also seen its CEO being re-designated to Mr. Zainal Abidin, ex- Malakoff CEO with multiple years of experience in the energy business.

• Acquired Energy assets at the right time. To kick start its venture into the Energy business, the group acquired OGPC, an equipment provider for O&G industries covering the whole chain from upstream to downstream. Based on its latest FY15 earnings base of circa RM20m, the purchase consideration of RM170m implies a PER of 8.5x, a fair level given the relative resilient nature earnings of the business amid industry downturn.

• Ping Petroleum to add another income stream. DNEX has also invested in 30% stake of Ping Petroleum, an E&P company at its early stage with 50% stake in Anasuria Cluster, North Sea jointly-owned with Hibiscus Petroleum. Post several cost cuts and optimization, the mature oilfield is now cash flow positive while providing further income for DNEX at associate level.

• Explosive earnings growth for next 2 years. From FY15, the group’s earnings growth would be significant in the next 2 years with a 2-year CAGR of 72% expected in our earnings forecast. We have imputed earnings delivery from VEP Johor, umbrella oilfield service contract, OGPC sustaining earnings base and Ping Petroleum production profits.

Catalysts

• Robust growth prospects in all business pillars.

• Favorable O&G business acquisition timing.

Risks

• Oil production natural decline, non renewal of NSW contract.

Rating

• NON-RATED

• Positives – Huge potentials in new businesses.

• Negatives – Risks of O&G business margin erosion.

Valuation

• SOP valuation of RM0.34

Source: Hong Leong Investment Bank Research - 14 Sep 2016