We remain positive on Dagang NeXchange Bhd’s (DNeX) prospects despite minor near-term challenges, which include 1) delay in Thailand VEP-RC (Vehicle Entry Permit and Road Charge) and 2) lack of wins for directional drilling umbrella contract. That said, we expect major growth in FY18, underpinned by 1) increased trade facilitation services, 2) full-year contribution of PCS (portable container systems), 3) improving crude oil price, 4) expected turnaround at DNeX oilfield services (directional drilling unit) and 5) additional M&A opportunities. Maintain Buy on DNeX with lower TP of RM0.69 based on SOP valuation.

Loss of NSW Monopoly end-FY19

DNeX once again highlighted that it may lose its monopoly on the National Single Window in September 2019 when the contract ends. However, management noted that with all the additional features added into its trade facilitation platform, clients will be less willing to shift its business to other service providers. Furthermore, DNeX is actively looking for collaborators overseas (Norway, Germany and China) to further improve its platform’s technology. Thus, management believes that the above will enable them to maintain the same level of revenue despite the loss of monopoly. To recap, DNeX expected one-third of its NSW revenue to be lost previously. Nevertheless, we have factored in a 20% loss in NSW revenue in 2020 as a conservative measure.

No Thai VEP-RC but RFID Tech Contracts Expected

Disappointingly, management revealed that the Thai VEP-RC contract award would take a long time from now. However, the RFID technology will lead to possible new contracts. We suspect the contracts may be for the tolls on various highways in Malaysia, or possibly a similar VEP-RC system in a different country. Note that we completely removed the Thai VEP-RC contract from our earnings model and have not imputed any new RFID contracts. Thus, any new RFID contract obtained by DNeX will present potential upside to our earnings forecasts.

PCS Contract Scalable

To recap, OGPC secured a contract to supply portable container systems (PCS) to Petro Teguh last year. Management noted that delivery is way behind schedule and shared that only 7 systems were delivered in FY17. Nevertheless, it expects to deliver circa 50 units in FY18 and the remainder in FY19 before the contract ends. DNeX’s management was animated when discussing the future prospects of PCS, given its 1) modular concept (customisable based on requirements), 2) ability to solve the problem of lack of access to petrol in rural areas and 3) patented innovative design. Therefore, OGPC may decide to expand into fabrication of the PCS (currently only assembly).

Better Production at Anasuria

DNeX is expecting Anasuria’s production to improve dramatically in FY18 from circa 2.6k bbl/day in FY17. This is underpinned by 1) completion of planned shutdown in September 2017 (uptime was only 63% in FY17 compared to 90% in FY16), 2) gas lift carried out in one of the wells and 3) completion of a sidetrack in another Anasuria well. Thus, DNeX expects marginal growth from FY16 production levels in spite of the natural decline rate of oil fields. Furthermore, with the higher expected oil price in FY18 of USD60/bbl (FY17: USD58/bbl realised), DNeX associates earnings should increase substantially.

On the Prowl for Acquisition Targets

Despite currently carrying out the acquisition of Genaxis (accounting consulting company), DNeX remains on the prowl for further acquisitions. Management shared that it targets companies with 3 criteria, namely: 1) ventures that require help in completing the last mile 2) deep industry expertise and 3) scalable business model. Recent examples include: - 1) Ping Petroleum (Anasuria field), 2) OGPC and 3) DNeX RFID. Meanwhile, DNeX Telco is still working on securing a contract. i.e. its last mile. Given its net cash position and circa RM10mn operating cash flow we believe it has sufficient funding for acquisitions.

Impact

We make the following changes to our earnings model:

1. Impute FY17 figures into our model

2. Assume no wins under the Petronas Carigali contract but include RM9mn leasing contract to Baker Hughes.

3. Reduce PCS contribution from RM700k/unit to RM500k/unit as a conservative measure.

4. Increase expected production at Anasuria from 2.7k bbl/day to 3.4k bbl/day in-line with management’s guidance.

5. Revise USD/MYR assumption in FY18/19 to 4.0 from 4.1 previously.

Thus, we reduce our earnings forecast by 5.1%/4.6% for FY18/19 respectively. We introduce FY20 core net profit of RM67.3mn, which implies 11.0% decline in earnings. The decline is mainly from the loss of NSW monopoly, end of Petro Teguh PCS contract and assumption of no new contracts.

Valuation

After the earnings adjustments, we lower TP slightly to RM0.69 (previous: RM0.72) based on SOP valuations. We maintain BUY on DNeX underpinned by 1) better crude oil price, 2) lucrative government-linked contracts and 3) strategic M&A potential.

Source: TA Research - 16 Mar 2018