This article first appeared in The Edge Financial Daily on June 12, 2018

Dagang NeXchange Bhd
(June 11, 42.5 sen)
Maintain buy with a lower target price (TP) 64 sen: We emerged from Dagang NeXchange Bhd’s (DNeX) analyst briefing feeling positive about its prospects. Management focused mainly on the recent acquisition of Genaxis (51% subsidiary) and Innovation Associates Consulting (IAC) (60% subsidiary via Genaxis). 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 and Management Accounting System) valued at RM151.4 million for three years. Besides that, Genaxis has a current order book of RM20 million, 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.

Management revealed that 30%-owned Ping Petroleum is diversifying its asset base. We understand that Ping will begin development of its Avalon greenfield located in 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 capital expenditure required, DNeX intends to request Ping to pay out dividends, given strong cash flows 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 financial year 2017 (FY17).

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 million to RM21 million per annum with a gross profit margin of around 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.

OGPC Sdn Bhd 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 seven systems were delivered in FY17 whilst one was delivered in the first quarter of FY18. It still expects to deliver around 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. 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.

DNeX’s long-term outlook seems secure on the back of its Sealnet (previously known as 1Trade) trade facilitation system and development of Avalon field by Ping Petroleum. — TA Securities Research, June 11