Dagang Nexchange Bhd (NON-RATED)

Transcription

1 Dagang Nexchange Bhd (NON-RATED) INDUSTRY: NEUTRAL COMPANY INSIGHT Morphing into something bigger Highlights Catalysts IT software solutions provider. Primarily a software solutions provider, the group s core business is still being anchored by its bread and butter National Single Window (NSW) which has seen its contract being renewed by the government for another 2 years. Bagged lucrative VEP business. DNEX is looking to potentially increase its IT earnings base significantly by providing the Vehicle Entry Permit (VEP) in the Johor- Singapore border with 2 major revenue streams: CAPEX (RM45m) and OPEX maintenance (RM20 p.a.) with doubledigit margins expected. If the project is successful, the VEP software solution could be scaled to be applied on Thailand- Malaysia border also which could bring about additional income streams. Making Energy its 2 nd core business. Despite possessing a stable IT business, the group is not resting on its laurels by investing in Energy business through rights issue and special share issuance. To bring in experience, the group has also seen its CEO being re-designated to Mr. Zainal Abidin, ex- Malakoff CEO with multiple years of experience in the energy business. Acquired Energy assets at the right time. To kick start its venture into the Energy business, the group acquired OGPC, an equipment provider for O&G industries covering the whole chain from upstream to downstream. Based on its latest FY15 earnings base of circa RM20m, the purchase consideration of RM170m implies a PER of 8.5x, a fair level given the relative resilient nature earnings of the business amid industry downturn. Ping Petroleum to add another income stream. DNEX has also invested in 30% stake of Ping Petroleum, an E&P company at its early stage with 50% stake in Anasuria Cluster, North Sea jointly-owned with Hibiscus Petroleum. Post several cost cuts and optimization, the mature oilfield is now cash flow positive while providing further income for DNEX at associate level. Explosive earnings growth for next 2 years. From FY15, the group s earnings growth would be significant in the next 2 years with a 2-year CAGR of 72% expected in our earnings forecast. We have imputed earnings delivery from VEP Johor, umbrella oilfield service contract, OGPC sustaining earnings base and Ping Petroleum production profits. Robust growth prospects in all business pillars. Favorable O&G business acquisition timing. HLIB Research PP 9484/12/2012 (031413) 14 September 2016 Price Target: RM0.34 Share Price: RM0.275 Lim Sin Kiat LimSK@hlib.hongleong.com.my (603) KLCI 1,677.2 Expected share price return 23.6% Expected dividend return 0.0% Expected total return 23.6% Share price Information Bloomberg Ticker GRPB MK Bursa Code 0082 Issued Shares (m) Market cap (RM m) mth avg. volume ( 000) 17,227 SC Shariah-compliant Yes Price Performance 1M 3M 12M Absolute Relative Major shareholders Censof Holdings 29.3% Abdul Jalil Zainal Abidin 16.0% Arcadia Acres 15.7% Khazanah 13.7% Summary Earnings Table FYE Dec (RM m) 2015A 2016A 2017E 2018E Revenue EBITDA EBIT PATAMI EPS P/E (x) P/BV ROA (% ) ROE (% ) Risks Rating Valuation Oil production natural decline, non renewal of NSW contract. NON-RATED Positives Huge potentials in new businesses. Negatives Risks of O&G business margin erosion. SOP valuation of RM0.34 Page 1 of 6 14 September 2016

2 Introduction Before this year, DNEX (previously named Time Engineering) was mainly a software solutions company providing electronic Customs-related services to enhance the facilitation and streamlining of trading processes including import/export, trade and logistic industries. It is currently operating Malaysia s largest e-transactions exchange which serves over 13,000 users in the trade facilitation and logistics fraternity. Trade facilitation its bread and butter The group s bread and butter business is being the exclusive operator for the National Single Window (NSW) for the government, which is defined as the facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfill all import, export and transit-related regulatory requirements. Malaysia's NSW is an electronic approach to facilitate trade and increase efficiency of the Government delivery service by allowing: submission of data and information through a single point (single window); re-use of data and information; synchronized processing of data and information from relevant private and public parties; and Ultimately ensure the quick and efficient release of cargo from relevant authorities. NSW core to its IT business with contract renewed for another 2 years. Post the expiry of the contract with the government in 2015, the group has secured further 2 year renewal on the project, reducing the recent concerns of the non-sustainability of its core IT business. Figure #1 Single Window Connectivity HLIB Page 2 of 6 14 September 2016

3 Venturing into profitable VEP contract To grow its stable IT business, the group has also successfully become the contractor and operator of the Vehicle Entry Permit (VEP) and Road Charges (RC) system Project for the Ministry of Transport, Malaysia. This is a project whereby the government would collect RM20/entry for the vehicles coming in to Johor from Singapore which is considered high volume on a daily basis. There are 2 major income streams from the project namely (i) the CAPEX (RM45m) portion whereby the group helps to set up the software and systems in place for the implementation of the project and (ii) OPEX portion whereby the group has signed 6 year with 6 year additional extension for the maintenance of the system solution. Expanding into lucrative VEP business This project would provide steady income stream from its maintenance income estimated to be at RM20m p.a. with high profit margins (>30% operating margins ) for the years to come. The VEP project does not just stop at Johor. The Malaysian government is contemplating to set up similar facilities in the Thailand-Malaysia border despite the significantly lower traffic compared to Johor-Singapore. This is to allow the government to have a better control over the traffic flow on the border to improve natural security and reduce leakages. Despite the expected lower vehicle traffic, DNEX s contract value is expected to be of similar size to Johor-Singapore contract with CAPEX contract portion at circa RM50m, proving that the group would be able to scale on its software solutions for the VEP and RC system. Scaling opportunity for VEP software big Energy, the 2nd Pillar for the group DNEX has also ventured into the Energy business as the 2 nd pillar of its business to complement its IT business. The group has also brought in Mr. Zainal Abidin Abd Jalil, an experienced hand in the O&G business as the group CEO to spearhead the new venture. He has served as the CEO for Malakoff Corporation Berhad while possessing working experience in the O&G deepwater operations including FPSOs and subsea wells in multiple regions in the world. Earlier in the year, the group had acquired OGPC group with a purchase consideration of RM170m (revised downwards from previous acquisition price of RMm) through a mix of rights issue and share issuance. OGPC group is a piping equipment and service provider for the O&G, petrochemical, power and general industries. The group sells 3 major products: (i) pumps that comply with the American Petroleum Institute (API) which are deployed to move fluids mainly in O&G production, refining and petrochemical industries (ii) valves which are used to regulate, direct and/or control flow of fluids and gases and (iii) compressors which help to increase gas pressure. Its products could be applied across the whole value chain of O&G industry (upstream & downstream) and also the power industry, indicating that demand would remain resilient even amid downturn in the upstream industry. OGPC group a good catch with resilient business model OGPC group possesses sustainable earnings base averaged RM15-20m historically with double-digit margin. We expect the earnings base to recur in the coming years despite the discounts given to its clients as we expect OGPC to pass through the discount to its vendors. Page 3 of 6 14 September 2016

4 Other Energy ventures DNEX has recently completed the acquisition of 30% stake in Ping Petroleum, an E&P company who has made investments in the Anasuria Cluster, a mature field in North Sea jointly with Hibiscus Petroleum. Incorporated in Bermuda in 2012 with offices in Malaysia and Texas, Ping Petroleum is a privately held independent upstream company focusing on shallow water offshore production and development opportunities in South East Asia and North Sea. Currently, it is 30% owned by DNEX while the remaining stake is owned by private individuals who are also Ping Petroleum s management team. In March 2016, Ping Petroleum has completed its purchase of 50% stake in the Anasuria cluster in North Sea with remaining stake owned by Hibiscus Petroleum. Ping Petroleum, E&P venture owning mature asset in UK The Anasuria cluster is a producing mature field which comprises of 4 producing fields with a 2P reserves of 40mmboe coupled with estimated production of <7000 bbls/day. With allin cost of circa USD34/bbl, the mature field is still economically viable for oil production and would provide free cash flow to the group for the next few years. There is no near term plans of ploughing more cash into the business as the 1 st phase of the project is to increase uptime while optimizing costs. In the next 5 years, however, more asset portfolio expansion might be seen with potentially nearby oilfield tie-ins and participation in new field licensing rounds to be contemplated. Secured directional drilling contract DNEX has also managed to secure an USD90m 3-year umbrella directional drilling contract commencing in August This is the 1 st time job of this nature is given to a local O&G company as usually it would be dished out to foreign players like Schlumberger, Halliburton and etc, showcasing the group s ability to instill confidence in its clients on their project execution despite its late entry into the market segment. Directional drilling a 1 st for local players Previously, the group has already purchased the tools and equipment from Baker Hughes for USD4.2m to tender for the Petronas Umbrella directional drilling project. At any market condition, the local market size is worth USD200m p.a., huge for contract deprived O&G local service providers amid the current slowdown in the industry. However, this contract is on an on-call basis, suggesting that revenue from this contract would fluctuate based on the work orders issued by the clients during the contract period. Valuation Due to the stark differences between its 2 businesses, we value DNEX based on SoP. We peg a 12x PER to its IT business CY17 EBIT after tax, which is at the lower range of PER traded for IT solutions company. For its O&G business, we peg a 10x PER, which is the average PER traded for small-mid cap O&G counters. All-in-all, we arrive at fair value of RM0.34, providing a +23.6% upside from the current share price. In our derivation of fair value, we use the share base of million shares (enlarged base post rights issue and special issue). We have not factored in potential dilution it its warrants attached to the rights as the exercise price is at RM0.50, which is still significantly accretive to the company based on current trade price. Value 2 core businesses separately. Figure #2 SOP Valuation Valuation Method RMm RM/share IT business 12x PE Energy 10x PE Upside (% ) 23.6% HLIB Page 4 of 6 14 September 2016

5 Dagang Nexchange Bhd Income statement Cashflow FYE 31 Dec (RM m) 2015A 2016A 2017E 2018E 2019E FYE 31 Dec (RM m) 2015A 2016A 2017E 2018E 2019E Revenue Pre-tax profit Operating cost Net interest received EBITDA Working capital changes (26) Depreciation - (107) (57) (55) (54) Taxation (7) (15) (22) (21) (21) Net Interest Others (6) (6) (6) Associates Operating cashflow Jointly controlled entities Capex & acquisitions Exceptionals Free cashflow PBT Other inv cashflow Tax (7) (15) (22) (21) (21) - Net borrowings MI Share/convt bond issue PATAMI Dividends paid Core PAT Basic shares (m) 1,733 1,733 1,733 1,733 1,733 Other fin cashflow Basic EPS (sen) Net cashflow (14) (27) (15) 98 - Balance sheet Valuation ratios FYE 31 Dec (RM m) 2015A 2016A 2017E 2018E 2019E Net DPS (sen) Fixed assets FCF/ share (sen) Other long-term assets FCF yield Other short-term assets Market capitalization (m) Working capital (49) (85) (163) (163) (163) Net cash (m) Receivables Enterprise value Payables EV/ EBITDA (x) Inventory Net cash / debt Growth margins ratios Cash Sales Growth ST debt (18) (18) (18) (18) (18) Operating expenses LT debt (2) (20) (20) (20) (20) EBITDA Growth Shareholders' funds PBT Growth (2.3) (2.3) Share capital PATMI (2.6) (2.7) Reserves Basic EPS Growth (2.6) (2.7) Minorities Other liabilities Margin ratios EBITDA Margin Summary Earnings Table PBT Margin Revenue PATMI EBITDA Net profit P/E (x) BV /Share (RM) P/BV (x) ROA (% ) ROE (% ) Page 5 of 6 14 September 2016

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As of 14 September 2016, Hong Leong Investment Bank Berhad has proprietary interest in the following securities covered in this report: (a) As of 14 September 2016, the analyst, Lim Sin Kiat who prepared this report, has interest in the following securities covered in this report: (a) -. Published & Printed by Hong Leong Investment Bank Berhad (10209-W) Level 23, Menara HLA No. 3, Jalan Kia Peng Kuala Lumpur Tel / Fax Equity rating definitions BUY Positiv e recommendation of stock under coverage. Expected absolute return of more than +10% ov er 12-months, with low risk of sustained downside. TRADING BUY Positiv e recommendation of stock not under coverage. Expected absolute return of more than +10% ov er 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return betw een -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negativ e recommendation of stock not under coverage. Expected absolute return of less than -10% ov er 6-months. Situational or arbitrage trading opportunity. SELL Negativ e recommendation of stock under coverage. High risk of negative absolute return of more than -10% ov er 12-months. NOT RATED No research coverage, and report is intended purely for informational purposes. Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% ov er 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return betw een 5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% ov er 12-months. Page 6 of 6 14 September 2016