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Tuesday, October 11, 2016

Brokers Report: Dagang NeXchange Bhd - Strong Profit Growth at Attractive Valuation

Dagang NeXchange valued at RM0.35 a share

Dagang NeXchange (DNeX), formerly known as Time Engineering, was primarily an information technology (IT) software solutions provider. In recent years, the group has however diversified into the energy sector with the acquisitions of companies involving in the oil & gas segment. Going forward, DNeX is expected to derive 50% of its earnings from IT & e-services and the remaining from energy-related businesses. For FY17F, bottomline is anticipated to grow by about 19%, excluding potential capex and maintenance jobs from the Vehicle Entry Permit (VEP) project. The key conncern for DNeX is the expiry of the exclusive agreement to operate the National Single Window (NSW) but management has made effort to widen its e-commerce services with the introduction of new initiatives that offer Business-to-Business software system. This should help to provide some mitigating effect from the loss of exclusivity beyond FY18F. Our base case scenario values DNeX at RM0.35 a share, based on SOTP valuation. This translates to a forward PER of 10x, which is undemanding, in our opinion.
  • E-services provider with exclusive agreement to operate the NSW. DNeX was assigned the role of exclusive operator of the NSW for trade facilitation by the Malaysian government in 1989. Hence, the group has over 25 years of experience in the development of Business-to Government trade facilitation and e-commerce in the country. However, the exclusive agreement will expire in two years. In its attempt to offset potential loss of income, DNeX has introduced new e-services initiatives to widen its sources of earnings. The group is also the contractor of VEP Phase 1 project at the Johor-Singapore border. It is also negotiating for the maintenance job that would provide a stable recurring income and the next capex job at the Malaysia-Thailand border.
  • Low entry st into the energy sector. In 2014, DNeX diversified into the energy sector by acquiring an equipment and service provider, OGPC. In the following year, it acquired a 30% stake in Ping Petroleum (Ping), which holds a 50% stake in four oil producing fields located in the UK Central North Sea called Anasuria Cluster. Both acquisitions were transacted at reasonably low pricing, in our view. In 1H16, DNeX has recognized negative goodwill amounting to RM81m for having to acquire undervalued asset (i.e. Anasuria Cluster).
  • Diversified earnings base. From FY16 onwards, with the completion of the oil & gas acquisitions, DNeX should derive 50% of its earnings from the energy sector and the remaining from IT & e-services. In our FY17 earnings forecast, we exclude the VEP Johor-Singapore maintenance job and the Malaysia-Thailand border capex works. We believe we have conservatively accounted for the Petronas umbrella contract in FY17F, assuming the bulk of the contribution to be recognized in FY18/19F (in line with our oil price outlook).

Source: PublicInvest Research - 10 Oct 2016

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