· Customs-related core business. Dagang Nexchange Bhd (DNEX) is an ecommerce service provider focusing on streamlining international trading processes. It operates the National Single Window (NSW), a trade facilitation system to expedite custom clearance processes paperlessly. Currently, more than 90% of DNEX’s revenue is derived from the exclusive agreement to run NSW, which is ending in September 2016.

· Successful turnaround in FY14. DNEX managed to accomplish its turnaround mission in FY14, recovering from a net loss of RM21,000 to a net profit of RM12.2m, mainly attributable to its cost optimisation program. For 1Q15; stripping off the one-off VSS payment of RM5.5m, DNEX would have almost tripled its PAT to RM6.0m from RM1.9m a year ago, widening its net profit margin to 27.3% from 10.4%. Going forward, we are projecting its FY15 topline to grow 5% YoY (in line with our in-house GDP growth forecast) to RM91.2m with an estimated net margin of 18%, bringing its FY15E net profit to RM16.4m (+34.4% YoY).

· What’s next after expiry of NSW? Nonetheless, we also understand that the Customs has decided to replace NSW with uCustoms under a new framework, allowing users to choose their preferred service providers. We understand that DNEX is one of the two companies that had submitted tender. Being the incumbent, we believe the company will likely be appointed, but it may suffer a market share drop for losing its monopoly status. On top of that, DNEX is likely to face margin compression as the transactions fees are no longer fixed by the authority but subject to market players. Therefore, there is a possibility that new players will slash margin to penetrate the market. Meanwhile, the Customsrelated e-commerce service provider is envisaged to seize the entire market space of trade facilitation sector by capitalising its existing 24,000 users, including freight forwarders, importers and exporters, For instance, myTrade2cash is one product launched last year to facilitate exporters on trade financing.

· Venture into O&G segment. To recap, the company proposed to acquire OGPC group, a local oil and gas equipment and services provider for RM203m in June last year. The purchase price was subsequently revised to RM170m to factor in weaker oil prices in March this year and the deal is expected to be completed by 1Q16. This fetches a PER of 8.5x based on the average three-year PAT of RM20m from FY11 to FY13. We reckon the deal is fair as it is in line with O&G small cap valuation of 7-10x PER in a down cycle. Post-acquisition, we expect DNEX’s bottomline to surge to RM36.7m (+123.3% YoY) in FY16.

· Ambitious plans in the pipeline. Acquisition of OGPC is not the only move taken by DNEX to diversify into O&G sector as well as power sector. In 1Q15, its 80% owned subsidiary, DNEX Oilfield has secured a sale-and-leaseback agreement from Baker Hughes to rent a well drilling equipment and other ancillaries for four (4) years with an option to extend for another two (2) years. Aside from this, we came to understand that the management is also seeking to acquire less capital-driven brownfield assets. As for power sector, DNEX is targeting small power plants with capacity ranging from 100MW to 300MW in the ASEAN region. Such projects are still at infancy stage and hence not accounted for in our earnings projection.

· NOT RATED. To fund the afore-mentioned assets, DNEX has proposed to raise fund through special and rights issue with warrants attached. Assuming full takeup of rights and special issue (refer to Table 1 for the details of respective issues), DNEX’s share base would be enlarged to 1,732.9m shares (excluding out-ofmoney warrants and proposed ESOS) from its existing 775. 2m with FY16 EPS diluted to 2.1 sen. However, be mindful that due to poor sentiment and recent selldown by investors, DNEX was last traded below its issue price of the abovementioned exercises, resulting in a higher TEAP at RM0.215. The FD ex-all TP of RM0.19/share is derived from the valuation metric of CY16 9.0x PER which is in line with the FBMSC. Meanwhile, do take note that cum-TP remains at RM0.19/share assuming the proposed corporate exercises and acquisition do not go through. In a longer run, we believe DNEX is poised to generate more returns from the projects mentioned above as it will have a strong war chest of more than RM100m cash post the corporate exercises. 

Source: Kenanga Research - 18 Aug 2015