DNeX to reap fruits of diversification

  • Zainal Abidin says the group has now completed its strategic transformation and is now an entrepreneurially driven company. Photo by Kenny Yap
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This article first appeared in The Edge Financial Daily, on March 20, 2017.


KUALA LUMPUR: Dagang NeXchange Bhd (DNeX) has made significant progress since the IT & e-services solutions provider set out to diversify its earnings base, pressured by the impending expiry of its concession with the Royal Malaysian Customs Department to operate and maintain the National Single Window (NSW) ecosystem.

The NSW — a one-stop trade facilitation system — has been the bread and butter for DNeX since its launch in 2009.

The system is slated to be replaced by the Royal Malaysian Customs’ Ubiquitous Customs (uCustoms) system in September next year. “Our revenue is expected to be down by 30% to 40% when the NSW concession expires,” said DNeX managing director Zainal Abidin Abd Jalil.

In a bid to make up for the expected loss of revenue from the expiry of the concession, the company had ventured out to diversify its earnings portfolio through the rolling out of new products under its traditional e-services segment and its diversification into the energy segment.

Zainal Abidin said the group has now completed its strategic transformation and is now an entrepreneurially driven company. The group is looking towards scaling up its operations.

“We have been actively diversifying into energy and also actively rolling out IT and services products, just to be sure we can find a replacement revenue stream on the expectation that come September 2018, a portion of our revenue will be lost when the NSW concession expires,” he told The Edge Financial Daily in an interview.

Nonetheless, he said DNeX will still be able to retain up to 70% of its revenue from the NSW business after the uCustoms system comes online, as the group will be one of the only two service providers to the customs department, the other being Edaran Trade Network Sdn Bhd.

The market has responded positively to DNeX’s progress, as its share price spiked as much as 19.5 sen or 76% year to date, to touch an all-time high of 45 sen on March 2, following the slew of new contract wins the company announced over the first two months of 2017.

One of its recent wins is its appointment as the service provider for the home ministry’s eWork Permit System.

Quoting figures from the Immigration Department, Zainal Abidin said there are approximately 600,000 undocumented foreign workers in the country that have to undergo the formalisation of work permit process.

“We estimate to get one-third of that figure. With 200,000 transactions at RM30 per transaction, we can get about RM6 million in revenue. Our margin for this is also very good at more than 80%.

“So 600,000 is a start for the contract. Of course, we are interested in doing more. We don’t foresee it to be a short-term job,” he commented when asked if DNeX is exploring other IT jobs from the home ministry.

Meanwhile, he said the group will continue to bid for government contracts, adding that the group has also secured a RM104.3 million contract to manage the vehicle entry permit (VEP) and road charge (RC) systems for foreign registered vehicles entering Malaysia through Johor, a new venture for the group.

The group is also conducting a feasibility study for the Thailand-Malaysia border for the Malaysian government and has also been appointed as an exclusive project consultant by Thailand-based Tiffa EDI Services Co Ltd for the implementation of VEP and RC for the transport ministry of Thailand.

DNeX is also looking at applying the NSW system at the regional level through its active participation in the Pan Asian e-Commerce Alliance industry group, which encourages international collaborative efforts in the region.

Besides that, the company has also set up an energy division, adding a new revenue stream to the group.

The group in 2014 acquired the OGPC Group — a provider of equipment and services for the oil and gas (O&G), petrochemicals and power and general industries — as well as a 30% equity stake in Ping Petroleum Ltd in 2015.

“Entering the upstream O&G business last year was a contrarian move, given that the industry was facing a downturn. The market was terrified as the downturn caused significant volatility in crude oil price.

“The low crude oil price made it uneconomical for upstream activities, so we were able to invest in Ping Petroleum, picking up a quality asset at a lower risk and price,” he said.

Ping Petroleum has a 50% stake in the Anasuria cluster in the UK’s Central North Sea, with the group eyeing to acquire another similar long-cycle brownfield asset in the North Sea sometime within 2017.

The acquisition, which was met with scepticism earlier, proved to be a boon for DNeX.

According to Zainal Abidin, the production volume has increased due to faster up time and cost of production has been reduced to US$20 (RM88.60) per barrel.

“It is a brownfield so it is currently an income-generative asset,” Zainal Abidin added.

The 30% equity stake in Ping Petroleum has provided a significant boost to the group’s financial results for the financial year ended Dec 31, 2016 (FY16) due to a write-back on asset value as oil prices rebounded to around US$50 per barrel towards end-2016.

DNeX’s net profit grew nearly 12 times to RM133.74 million in FY16 thanks to the one-off gain of RM89.6 million. Revenue almost doubled to RM178.46 million from RM95.55 million.

The new kid on the block in the O&G sector has secured two mini bids worth RM7 million in total under its umbrella contract with Petronas Carigali Sdn Bhd. The contracts are awarded to its directional drilling unit DNeX Oilfield Services Sdn Bhd.

“We have won two out of the six work order tenders and we are currently carrying out our first job under this umbrella contract, for Petronas’ offshore wells at Tukau Timur Field.

“We hope to secure a second contract with another international operating company in Malaysia,” said Zainal Abidin without revealing specifics.

The newest addition to its energy segment is Forward Energy Sdn Bhd, which has the mandate to do small scale power projects. The unit currently has a minority stake in a fuel oil power plant in Bangladesh, but Zainal Abidin said the focus will be more on renewable energy going forward.

He highlighted that Forward Energy is currently bidding for two projects in Indonesia, namely a mini hydro plant and a geothermal project.

With all its chips in place, Zainal Abidin said DNeX is well positioned to post further growth for FY17.

He added that the group is also looking at opportunities to grow inorganically via mergers or acquisitions for both its IT & e-services segment and the energy segment.

“Overall, we have reduced our dependence on the NSW concession, which has been our sole breadwinner over many years for the group. We have built a business model with multiple revenue streams, which is important for us as a public listed company,” said Zainal Abidin.