We are still rather positive on DNeX’s future prospects after an analysts briefing hosted by management. Although the Thai border Vehicle Entry Permit and Road Charges (VEP-RC) and new brownfield acquisition are unlikely to materialise this year, DNeX’s FY17 earnings growth will be sustained by:- 1) higher margins from the trade facilitation business, 2) increased contribution, from OGPC and 3) mini-bid wins from the directional drilling umbrella contract. Thus, we maintain our Buy recommendation on DNeX. After adjusting our forecasts, our TP is adjusted higher to RM0.74/share.

Key takeaways from the analysts’ briefing are as below:

• As DNeX is in a net cash position, any future acquisitions or business expansion could be implemented via borrowings. Furthermore, it will be able to pay out dividends to reward shareholders.

• Revenue from trade facilitation remained consistent in 1Q17. However, there was significant margin expansion as DNeX managed to secure higher margin permits such as motor approved permits and private jetty permits.

• We believe the introduction of new permit applications via National Single Window implies that the uCustoms system, which would have ended DNeX’s monopoly would be delayed again. Therefore, it is highly probable that DNeX will maintain its monopoly after Sep-18.

• VEP-RC margins also improved as the opex portion has higher margins compared to the capex portion. Besides that, management expects an additional RM8.5mn to be billed by end-17 for the final capex portion payment.

• On the other hand, we understand that DNeX is still in talks with the government regarding the Thai border VEP-RC. Hence, no timeline has been confirmed. Thus, we believe it is unlikely to materialise in FY17.

• Contributions from the eWork permit system (rehiring of foreign workers) will only commence in 2Q17. The Group has processed about 16k foreign workers since Feb, which is within expectations. In our opinion, DNeX’s partner may be able to secure the renewal of foreign worker permits as well going forward.

• In the energy division, DNeX secured two mini-bids worth RM7mn from Petronas Carigali which will be recognised in 2Q17. Going forward, we expect it to secure more mini-bids as it is the sole local player competing under the umbrella contract. However, management revealed that margins have not been as lucrative as previously expected given that competition remains tight.

• OGPC continues to contribute positively to the Group and also saw a slight margin expansion. Management’s near-term goal is to expand into the downstream segment, which would further expand margins and increase the number of contracts available

• Recall that associate contribution in 1Q17 was rather subdued at RM4.5mn. This was due to lower production (-33% QoQ) at Anasuria field, arising from well intervention works being during the quarter. However, the works have since been completed and management expects production to normalise in subsequent quarters.

• Besides that, management also revealed that there will be a planned production shut-down at Anasuria for a turnaround in Sep-17. The shutdown would last for circa 20 days and would likely register some lumpy costs.

• Lastly, management revealed that winning the tender for a new brownfield is now a long shot given the large number of bids. That said, DNeX still intends to acquire a brownfield with similar characteristics to Anasuria. The required characteristics are: 1) divested by an oil major, 2) late cycle and able to be turned around via lower production costs and 3) upside to oil reserves. Note that we have not included any earnings from new brownfields at this juncture.

Impact

We make the following changes to our earnings forecast:

• Assume the Thai border VEP-RC will only begin in FY18 as compared to FY17 previously.

• Lower net average daily production for Anasuria field as a result of well intervention and planned shutdown.

• Increase margins for trade facilitation, and assume DNeX maintains its monopoly in FY19. Recall that we had previously expected DNeX to lose one-third of market share. Thus, our earnings are increased by 3.6%/2.8%/15.3% for FY17/18/19.

Valuation

• We increase our TP to RM0.74/share based on SOP valuations after accounting for change in earnings. Maintain BUY on DNeX as in our opinion, it expanded into the O&G sector at the right time. Furthermore, high margin, recurring income from its government-linked contracts should cushion any downside risk.

Source: TA Research - 19 Jun 2017