We remain positive on Dagang NeXchange Bhd’s (DNeX) prospects despite minor near-term challenges, which were well flagged by management. This includes 1) maintenance shutdown at Anasuria in 3QFY17, 2) lower than expected rehiring of foreign workers and 3) lower margins at OGPC. We expect a stronger 2HFY17 underpinned by 1) increased trade facilitation services, 2) maiden contribution of portable container systems (PCS), 3) chunky final revenue contribution from Malaysia-Singapore VEP-RC and 4) stronger crude oil price. Maintain Buy on DNeX with lower TP of RM0.75 based on SOP valuation.

Key takeaways from the analyst briefing include:

IT & E-services

• The group is expected to expand its B2B and B2G business in trade facilitation by increasing convenience facilities. This will allow DNeX to maintain significant market share if it loses its monopoly in Sep 2018. This is because clients would be less inclined to switch service providers.

• As previously mentioned in our 2QFY17 results update, DNeX expects to recognise final revenue contribution of RM9mn from Malaysia-Singapore VEPRC capex contract in 4QFY17. We note that the Group is still in negotiations for the Thai-Malaysia VEP-RC.

• According to management, the number of eWork permits issued was below expectations at circa 150k as at end-June (FY17 estimate: 600k). Furthermore, management revealed that DNeX merely recognised circa RM1mn from eWork permits in 1HFY17, despite receiving YTD applications of 90k in its system. Thus, we estimate that only 35k applications were recognised as revenue in 1HFY17.

Energy

• Management noted that DNeX Oilfield Services (DOS) will continue to be loss-making in FY17 with a possible turnaround only in FY18. To recap, DOS, DNeX’s directional drilling unit completed 2 mini-bids under the Petronas Carigali umbrella contract, and is currently bidding for an additional 5 minibids. It is also bidding for other umbrella contracts from Sapura Energy and Murphy Oil.

• Margins for OGPC’s upstream business have narrowed due to cost rationalisation activities by its clients. This motivated the Group to expand into downstream services, i.e. supply of PCS to Petro Teguh.

• Progress billing for PCS contract is expected to boost OGPC’s 2HFY17 contribution. Management targets 30 units valued at RM15mn to be delivered by end-FY17.

• Management revealed additional details on the planned shutdown at Anasuria. The 31-day shutdown, starting 15 Sep, is mainly for production enhancement, and remains on schedule at this juncture. Gross maintenance capex incurred was USD2.5mn.
   
• Management also noted that although average daily production would be lower in 3QFY17, barrels of oil sold will remain steady as Ping has an inventory surplus. Nevertheless, the higher crude oil price in 2HFY17 will cushion any shortfall in production volume.
   
• Management was pleased to share hydrocarbon discovery at Ping UK’s exploration well at Avalon oilfield, although oil reserves have yet to be finalised. On the other hand, Ranger oilfield disappointed as it turned out to be a dry well. To recap, Ping UK has a 50% and 20% working interest in Avalon and Ranger oilfields respectively.

Others

• DNeX intends to formalise a dividend policy to reward shareholders via cash dividends. We expect a 25% dividend payout policy which implies a decent 2.1% yield.

• The group undertook RM17.5mn borrowings in 2QFY17 to part-finance two units of annex semi-detached 7-storey office towers located in Cyberjaya. To recap, it is currently leasing an office in Bangsar South.

Impact

• We reduce our earnings estimates slightly by 0.9%/0.8%/0.7% in FY17/18/19 to take into consideration lower than expected eWork permit applications.

Valuation

• We lower our TP slightly to RM0.75 (previous: RM0.76) based on SOP valuations following the change in earnings estimates. Maintain BUY on DNeX, underpinned by 1) better crude oil price and 2) lucrative governmentlinked contracts.

Source: TA Research - 28 Sept 2017