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Wednesday, December 7, 2016

Brokers Report: Dagang Nexchange - Widening Earnings Base

Recommend BUY call with target price (TP) of RM0.28

DNEX is gradually widening its earnings base through acquisition of oil producing assets and OGPC, an oil and gas services provider, diversifying from its traditional bread and butter base in IT and e-services. The two-year extension of NSW contract allows DNEX to prolong its exclusivity on trade facilitation system while establishing new income stream from VEP contract. We recommend a TRADING BUY on DNEX with a Fair Value of RM0.28 based on 10x FY17E PER.

Two-year extension of NSW. DNEX has alleviated investors’ concern over its operation of core business, National Single Window (NSW), the trade facilitation system to expedite paperless custom clearance process with the successful two-year extension until September 2018 from the government. The service charge remains unchanged at 75.0 sen/kb for government agencies, 80.0 sen/kb for the private sector and RM5/successful application. This allows DNEX to prolong its exclusivity for another two years before switching to uCustoms under a new framework to allow users to choose their preferred service providers.

VEP contract to boost its core earnings. Apart from steady earnings from NSW, its IT and e-services earnings for FY16 are fueled by the Vehicle Entry Permit (VEP) contract secured in February this year. The contract involves setting the system for the government to register foreign vehicles entering the southern border of Peninsular Malaysia and charge RM20 for every entry. Subsequently, DNEX is aiming to secure the maintenance contract for the system installed, which could potentially generate recurring income. Additionally, we believe there is an opportunity for DNEX to replicate the similar business model on the northern border of Peninsular Malaysia.

Maiden earnings from O&G segment. In August, DNEX completed its acquisition of OGPC Group, an oil and gas equipment and services provider. We are guided that OGPC’s earnings had remained resilient at in 2015 at c.RM20m despite the industry downturn amidst weak oil prices. Meanwhile, DNEX’s O&G segment is expected to benefit from the three-year USD70m directional drilling contract secured from Petronas Carigali earlier in May this year. Additionally, DNEX will generate associate income from its 30% stake in Ping Petroleum, which has 50% stake in the Anasuria cluster. The cluster which consists of four producing oil fields is located c.175km east of Aberdeen, UK North Sea and has 2P oil reserves of 20.25m bbls (net to Ping Petroleum). The field is currently producing at 6.4k bbl/day and with an operating cost of c. USD23/bbl. Having said that, we do not discount the possibility of the field requiring further drilling program in order to further boost production.

Trading Buy call with fair value of RM0.28/share. We are projecting DNEX’s earnings to grow 193% and 48% in FY16 and FY17, respectively, assuming: (i) steady earnings from OGPC, and (ii) associate income from Anasuria cluster. With the potential strong earnings prospect, we are calling a TRADING BUY on the stock with a fair value of RM0.28/share pegged to 10x FY17E PER, which is higher than small-medium sized oil and gas peers of 7-9x due to its: (i) superior net margins of 20-22%, and (ii) net cash position. Do take note that our calculation of EPS excludes conversion of warrants given that its exercise price is at 50.0 sen/share. Risks to our call include: (i) delay in execution of VEP, (ii) failing to execute directional drilling contract, (iii) lower-than-expected crude prices, and (iv) higher-than-expected natural decline rate of production for Anasuria cluster.

Source: Kenanga Research - 07 December 2016

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