We remain positive on Dagang NeXchange Bhd’s (DNeX) prospects despite minor near-term challenges which include: 1) delay in Thailand’s VEP-RC (Vehicle Entry Permit and Road Charge), 2) lower margins from competitive directional drilling umbrella contract, and 3) delayed delivery of portable container systems (PCS). Nevertheless, we believe our 21.2% PAT growth in 2018 is achievable underpinned by: 1) increased trade facilitation services, 2) maiden contribution of PCS, 3) increasing crude oil price, 4) expected turnaround at DNeX oilfield services (directional drilling unit), and 5) possible expansion into renewal of work permits. Maintain Buy on DNeX with lower TP of RM0.72 based on SOP valuations.

Key takeaways from the analyst briefing include:

IT & E-services

• The group was pleased to announce the extension of its National Single Window (NSW) contract. Management is currently in active discussion with the regulators to map out future plans at the end of the extension period. Additionally, margins for the division has been steadily increasing as DNeX continues to offer additional value-added services.

• As previously mentioned in our 3QFY17 results update, DNeX expects to recognise final revenue contribution of RM9mn from Malaysia-Singapore VEPRC capex contract in 4QFY17. However, we note that management believes this payment will now only be realised in FY18. Furthermore, we understand that the Thai VEP-RC contract is moving slowly. DNeX does not expect an award in the near future.

• That said, the number of eWork permits issued have been substantial at 110k as of November 2017 (end-June: 50k units). We note that the project proves DNeX’s system is scalable and it may start expanding into the renewal of work permits.

• Lastly, DNeX’s 1Trade system, Malaysia’s first one stop portal for total cargo and trade management was launched and is expected to be a game changer. It provides cheap and convenient trade management services across 5 different countries. Management notes that a few large companies have already begun using its system.

Energy

• Management noted that DNeX Oilfield Services (DOS) will likely turnaround in FY18. Although it won only 2 of 14 mini-bids under the Petronas Carigali umbrella contract in FY17, it is now verified as a self-operating directional drilling service provider. Thus, management believes it will be able to secure additional contracts more easily in the future.

• Besides that, DOS also targets to lease its underutilised tools to Baker Hughes in 2018. This will help maximise utilisation of resources even if it does not secure directional drilling contracts.
• According to management, bidding within the Petronas Carigali umbrella contract has been intense. As a result, margins within the umbrella contract have been below expectations. However, this will be partially offset by a RM14mn grant given by the government for purchase of technology incentives.
• Management noted that PCS deliveries are behind schedule due to difficulties in obtaining approvals at local sites. Therefore, it expects to only begin recognising revenue in FY18 from this business. To recap, it secured a contract to supply 100 PCS for Petro Teguh with estimated contract value of RM50mn-RM75mn over 2 years.

• Although maintenance at Anasuria FPSO did not impact 3QFY17 earnings, lower production may impact 4QFY17 earnings as lifted volumes were lower. However, the higher oil price in 4QFY17 will offset the lower lifted volumes.

• That said, production and lifting volumes in FY18 should be rather impressive as the Anasuria field hits record production levels. This is a result of the recent maintenance and production enhancement activities i.e. gas lift, reopening of sour wells and major turnaround at Anasuria FPSO.

• Besides that, DNeX is still on the lookout for a brownfield similar to Anasuria albeit at a higher purchase consideration given the improved crude oil price outlook.

Others

• DNeX continues to implement its strategy of inorganic growth by acquiring companies with growth potential and industry expertise. Recent examples include: 1) Ping Petroleum (Anasuria field), 2) OGPC, 3) DNeX RFID, and 4) DNeX Telco. Given its net cash position we believe it has sufficient funding to expand via acquisitions.

Impact

• We make the following changes to our earnings model: 1. Remove Thai VEP-RC contract and shift last Singapore VEP-RC contract payment to FY18. 2. Reduce our assumption of bid wins under Petronas Carigali contract. 3. Expect PCS contributions to only begin in FY18 as compared to FY17 previously. 4. Reduce expected production of Anasuria field and crude oil price assumption to USD60/bbl and USD65/bbl in FY18 and FY19 in-line with our house forecast. (previous: USD62.5/bbl) 5. Increase NSW operations margins to be in-line with historical results.

• Thus, we reduce our earnings forecast by 4.3%/7.2%/2.9% for FY17/18/19 respectively.

Valuation

• After the earnings adjustments, we lower TP slightly to RM0.72 (previous: RM0.75) based on SOP valuations. Maintain BUY on DNeX underpinned by: 1) better crude oil price, and 2) lucrative government-linked contracts.

Source: TA Research - 22 Dec 2017