The News

Dagang NeXchange Bhd (DNeX) announced that its subsidiary, OGPC, was awarded a contract for the design, engineering, procurement, construction, installation, commissioning and maintenance of up to 100 portable container systems (PCS) for Petro Teguh. The contract has estimated value of RM50mn RM75mn over 2 years, depending on the type of portable container systems constructed. Additionally, the Group will provide maintenance and supply of parts for a period of 10 years from the commissioning date. The contract value for this portion has yet to be revealed. Petro Teguh’s core business is the construction of mini pump stations for Petronas Dagangan Bhd.

Our View

• The contract is in-line with management’s intention of expanding OGPC’s services into the downstream segment, and is positive for the Group as it enables expansion of its earnings base.

• We note that this is a new product for OGPC. Hence, project execution is a key risk. That being said, the construction is still within the realm of its core business. We understand that the PCS will be used for the supply of petrol at fish landing jetties throughout Malaysia.

• The first 100 PCS will likely be a proof of concept. Hence, we do not discount the possibility of additional orders after the contract period ends.

• Details for the maintenance portion of the contract besides the tenure have not been revealed at this juncture. Hence, there may be further upside for earnings in the near future.

Impact

We make the following changes to our earnings forecast:

• Increase OGPC’s revenue in FY17/18/19 by RM10mn/RM35mn/RM15mn assuming total contract value of RM60mn over the next 2 years.

• Assume maintenance fee of RM15mn to be recognised in FY19. Thus, our earnings are increased by 2.0%/4.6%/3.7% for FY17/18/19.

Valuation

• As a result of the increase in earnings, our TP is raised to RM0.76 (previous: RM0.73) based on SOP valuations. 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 earnings downside risk.

Source: TA Research - 7 Jul 2017