Investment Merits

• Beneficiary of higher crude oil price

• Stable earnings from IT segment

• Scalable RFID expertise

Company Profile

Dagang NeXchange (DNeX) is a provider of IT services to the Government, through the National Single Window (NSW) concession. It is also involved in other IT infrastructure for the Government. DNeX owns a stake in Anasuria Cluster, an oilfield in the North Sea.

Highlights

Beneficiary of higher crude oil price. DNeX owns 30% of Ping Petroleum, which in turn owns 50% of the Anasuria Cluster, an oil & gas field located in the North Sea. The field has an estimated remaining lifetime of 20 years, with 2P reserves at 40.4mbbls of oil and 27.9bscf of natural gas. The field is served by a floating, production, storage and offloading (FPSO) vessel jointly owned by Ping Petroleum and Anasuria Hibiscus, the other stakeholder in the Anasuria Cluster. The cluster is a brownfield asset with positive cash flows. We estimate that every 5% movement in crude oil price would increase valuations of the cluster by 19%. Apart from its stake in Anasuria Cluster, DNeX owns 80% of DNeX Oilfield Services, the only local player for directional drilling. The drilling arm has secured a USD70m umbrella contract from Petronas.

Stable earnings from IT segment. DNeX is the exclusive operator of the NSW, which facilitates trade and customs arrangements for the private sector and the customs department. The concession has been extended until Sep 2018 after which the new uCustoms system would be operational in parallel with the NSW. Apart from NSW, DNeX is also the service provider for the eWork permit system, for the rehiring of illegal foreign workers from 15 countries.

RFID expertise. Owing to its expertise in radio frequency identification (RFID), DNeX has been appointed as the contractor and operator for the Vehicle Entry Permit (VEP) and Road Charges (RC) system project. Capex for the project is estimated at MYR45m while the 5-year operations and maintenance contract is valued at MYR105m. DNeX has also been appointed as the project consultant for VEP & RC for the Thai-Malaysia border, and other borders into Thailand.

Company Report Card

Latest results. DNeX’s FY16 earnings came in at MYR132m, an increase of 735% from its FY15 earnings, largely attributed to contributions from the Anasuria cluster.

Balance sheet/cash flow. DNeX currently has zero borrowings as it pared down debt from its fund raising exercise in mid-2016. Cash position stood at MYR67m. We understand that DNeX would be utilising a portion of its cash for a second brownfield asset.

ROE. ROE for FY16 came in at 55.2%, attributed to higher earnings coming from its energy segment.

Dividend. DNeX paid a DPS of 1.5sen for FY16, translating to a payout ratio of 19%.

Management. The company is led by its group managing director, Zainal Abidin Jalil, a former CEO at Malakoff Corporation. Datuk Samsul Husin, DNeX’s executive deputy chairman, provides a steady hand in the IT segment.

Recommendation

We like DNeX after its transformation, given that it has a diversified revenue stream from both IT services as well as the energy segment. Its IT services business provides both recurring income from the NSW facilitation, as well as new growth opportunities through its RFID expertise. The energy segment is a beneficiary of higher crude oil price from its stake in the Anasuria Cluster, as well as improved work orders for its directional drilling arm. We value DNeX at MYR0.71 using an SOP valuation. Its IT segment is valued at FY17 P/E of 10x, while its Anasuria Cluster is valued using DCF at a discount rate of 10%, on par with other oilfield valuations.

Source: RHB Securities Research - 5 May 2017