DNeX expected to grow, consolidate current ops

This article first appeared in The Edge Financial Daily, on December 18, 2018.
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Dagang NeXchange Bhd
(Dec 17, 22.5 sen)
Maintain buy with a lower target price of 41 sen:
Dagang NeXchange Bhd’s (DNeX) management said its 30%-owned Ping Petroleum Ltd will continue enhancing production at the Anasuria cluster, off the North Sea in the UK, by strategically increasing the number of wells. The productivity enhancement initiatives will focus on existing producing fields — the Guillemot, Teal, Teal South and Cook. Ping Petroleum aims to boost production at Anasuria by about 15% next year.

However, management noted that no lifting will be performed at Anasuria in the fourth quarter of financial year 2018 (4QFY18), leaving total FY18 lifting at four times against an earlier guidance of five liftings. We understand that 4QFY18 lifting will be delayed until January 2019. Consequently, five liftings are anticipated in FY19. That said, its Avalon field is expecting first oil in mid-2019, while production facilities will be completed in mid-2020.

Despite a large capital expenditure for ongoing developments, Ping Petroleum may potentially pay dividends, given strong cash flows from Anasuria’s operations. To recap, OGPC Sdn Bhd secured a contract to supply the portable container system (PCS) to Petro Teguh (M) Sdn Bhd last year. Management noted that delivery is way behind schedule — year to date, only a PCS unit had been delivered — primarily due to delays from regulatory approval.

We understand 41 PCSs are currently completed or under construction. Management is hoping to deliver seven PCS units before end-FY18, with the remaining to be delivered in the first half of FY19.

Owing to the persistent delays, DNeX decided to take a more conservative approach via a temporary halt of further PCS orders prior to the delivery of 41 units. While a slower-than-expected delivery is undesirable for its cash flow, we noted DNeX’s task under the contract is only to supply the PCS. Therefore, we believe DNeX will not incur any penalties for the delays.

Recall that information technology (IT) segment earnings before interest and tax margin fell to 14.6% in the third quarter ended Sept 30, 2018 (Quarter-on-quarter: -3.6 percentage point (ppts); year-on-year [y-o-y]: -19 ppts). DNeX revealed the decline in margin was due to more newer contracts with lower margin; an increase in manpower; and higher expenses incurred to stay competitive in the market.

However, the IT division’s revenue has risen significantly, recording RM152.8 million in the cumulative nine months ended Sept 30, 2018, or +52.7% y-o-y. We noted the National Single Window contract remains the main revenue generator for DNeX’s IT division.

We expect DNeX to take a step back from merger and acquisition activities and focus on growing and consolidating its current businesses. The group will leverage on the expertise of its subsidiaries — Genaxis Sdn Bhd, DNeX Telco Services Sdn Bhd and DNeX RFID Sdn Bhd — in securing and executing contracts.  Additionally, DNeX’s long-term outlook seems secured, underpinned by the SEALNET trade facilitation system and a further development of the Anasuria and Avalon hubs by Ping Petroleum. — TA Securities, Dec 17