We emerged from Dagang NeXchange Bhd’s (DNeX)’s analyst briefing feeling positive on its prospects. This is in spite of minor near-term challenges, which include 1) delay in delivery of Portable Container Systems (PCS) and 2) weakness at its Energy (ex-Ping) segment. That said, we expect major growth in FY18, underpinned by 1) acquisition of Genaxis consulting firm, 2) stronger crude oil price, and 3) new TnG connectivity contract. We raise our FY18/19/20 forecasts by 16.0%/11.6%/11.1%, and we maintain Buy on DNeX. However, we ascribe a lower PER multiple for its IT segment, and arrive at a lower SOP target price of RM0.64.

Acquisition of Genaxis and IAC Excites

Management focused mainly on the recent acquisition of Genaxis (51% subsidiary) and Innovation Associates Consulting (IAC) (60% subsidiary via Genaxis). To recap, IAC is the largest Malaysian consulting firm and competes with the likes of PwC, Ernst & Young, and Accenture. According to management, IAC has the edge when it comes to government contracts as it is cheaper but tends to fall short in the private sector given the lack of global experience. Nevertheless, IAC received the contract to implement 1GFMAS (Government Financial Management Accounting Service) valued at RM151.4mn for 3 years. Besides that, Genaxis has current orderbook of RM20mn, and is aggressively bidding for other contracts in the public and private sectors. We believe DNeX’s position as a government service provider is enhanced by the acquisition of the two consulting firms.

Ping Diversifies Assets

Management revealed that 30%-owned Ping Petroleum (i.e. Anasuria cluster operator) is diversifying its asset base. We understand that Ping will begin development of its Avalon greenfield located at the North Sea, offshore Ireland. Additionally, the group is bidding for additional exploration fields in the North Sea. Furthermore, Ping has begun bidding for an additional brownfield similar to Anasuria after losing the bid for a similar brownfield asset last year. Despite the large expected capex required, DNeX intends to request Ping to pay out dividends, given strong cashflows from the Anasuria operations. Note that Anasuria’s cash flows are directly linked to crude oil price and oil production is expected to increase after the maintenance activities carried out in FY17.

RFID Tag and TnG Connectivity

To recap, DNeX announced that it would provide connectivity between the existing Vehicle Entry Permit (VEP) system and TnG. The contract is expected to generate revenue of RM19-21mn per annum with gross profit margin of circa 35%. We understand that the RFID tag is currently encrypted on foreign vehicles entering Malaysia. However, going forward we believe the goal is to equip all local

vehicles with the RFID tag and collect toll payments via RFID. Additionally, DNeX is the sole supplier for this service in Malaysia given its link to the VEP. That said, the new government’s promise to abolish tolls may result in some downside risk. On the other hand, management revealed that the subcontract via Bukti Megah to rehire foreign workers has ended.

PCS Contract Delays Persist

To recap, OGPC secured a contract to supply PCS to Petro Teguh last year. Management noted that delivery is way behind schedule and shared that only 7 systems were delivered in FY17 whilst one was delivered in 1Q18. Nevertheless, it still expects to deliver circa 50 units in FY18 and the remainder in FY19. We note that a contract tenure extension is likely, given the delays on-site. DNeX revealed that the delays were mainly due to on-site dealers taking longer than expected to meet regulatory requirements. Nevertheless, DNeX is working closely with Petro Teguh to rectify the problems at the various installation sites. Note that DNeX’s task under the contract is only to supply the PCS. Therefore, we believe that DNeX will not incur any penalties for the delays.

Outlook

We expect DNeX to take a step back from M&A activities and focus on growing and consolidating its current businesses. The Group will focus on breaking even in the oilfield services business and push delivery of PCS. Besides that, we believe DNeX may strengthen its bidding capabilities for government contracts after the acquisition of Genaxis. Furthermore, DNeX’s long-term outlook seems secured on the back of its 1) SEALNET (previously known as 1Trade) trade facilitation system and 2) development of Avalon field by Ping Petroleum.

Impact

We make the following changes to our earnings model:

1. Increase crude oil price assumption in FY18/19 to USD70/75/bbl in-line with our house forecasts.

2. Include expected earnings contribution from Genaxis after completion of acquisition.

3. Include recent TnG connectivity contract of RM19-21mn and remove rehiring of foreign worker contract.

4. Assume revenue decline for OGPC instead of 5% revenue growth previously.

5. Increase annual capex to RM40-60mn in-line with management’s guidance. Thus, we increase our earnings forecast by 16.0%/11.6%/11.1% for FY18/19/20 respectively. The decline in absolute earnings in FY20 is mainly from the loss of NSW monopoly, end of Petro Teguh PCS contract and assumption of no new contracts.

Valuation

Despite the increase in earnings forecasts, we lower TP to RM0.64 (previous: RM0.73) based on SOP valuations. This is because we ascribed a lower target of 15x CY19 PER (previous: 24x CY19 PER) for DNeX’s IT segment. This is on the back of uncertainties surrounding government IT contractors following the recent change in government. We maintain BUY on DNeX underpinned by 1) better crude oil price and 2) continued growth at its trade facilitation services.

Source: TA Research - 11 Jun 2018