The News

• Dagang NeXchange Bhd’s (DNeX) 51% owned subsidiary DNeX Telco Services accepted a letter of award from Pt. Bina Nusantara Perkasa for IGG Marine Installation Subcontract, i.e. fibre optic laying in Indonesian waters.

• The contract will be valid for 131 days with an extension option up to 31 March 2019. The estimated lump sum contract price for the firm period is USD6.3mn (RM25.9mn based on RM4.10/USD).

• The contract is expected to begin in 4QFY18 and should positively impact DNeX’s earnings in FY18-19.

Our View

• We are ecstatic on the new contract win as DNeX Telco is a subsidiary that previously was not income-generating but has now secured a contract proving its capabilities.

• We note that DNeX previously performed the same feat with DNeX RFID and Ping Petroleum. The former secured the VEP-RC (Vehicle Entry Permit and Road Charge) contract for the Malaysian-Singapore border whilst the latter acquired Anasuria cluster which was earnings accretive immediately.

• Note that the contract value of RM25.9mn is sizeable and constitutes 13% of DNeX’s FY17 revenue base. That said, earnings contribution would likely be minimal given DNeX’s 51% stake. Assuming 10% net margin, we estimate that the contract would increase DNeX’s earnings by circa RM1.3mn (circa 2% of FY18 estimates).

• Nevertheless, our positivity stems from the possibility of future contracts as DNeX Telco proves its capability in its maiden contract win. We note that the VEP-RC contract was followed by a contract to provide network connectivity to the VEP system for Touch n’ Go’s back end system. On the other hand, Ping Petroleum began E&P activities after acquiring the Anasuria field. This resulted in hydrocarbon discovery in Avalon field, which boosted DNeX’s 2P oil reserves.

• Thus, despite the negligible earnings contributions, we believe the contract win projects a bright outlook for DNeX Telco.

Impact

• Given the expected negligible earnings contribution, we maintain our earnings forecasts.

Valuation

• We maintain our TP of RM0.63/share based on SOP valuations. We maintain BUY on DNeX underpinned by 1) better crude oil price and 2) continued growth in its trade facilitation services. Potential new contracts secured by its various businesses will present further upside for the Group.

Source: TA Research - 29 Aug 2018