Dagang Nexchange Bhd (DNeX), a company which has aggressively grown multiple businesses – 23 at last count – but whose latest quarterly results showed a slowdown in earnings, is slated for some interesting changes.
For one, it is poised to reap a windfall from the sale of its block of shares in Ping Petroleum Ltd in which it has a 30% equity interest.
Granted, oil prices are higher now than they were when the company bought the stake, suggesting the possible windfall.
Secondly, the company which is without a managing director (MD) at the moment, is likely to see board changes which may entail the appointment of a new head honcho.
After four years at the helm, former MD Zainal Abidin Jalil announced his resignation in January.
However, he remains as an executive director at the firm.
Meanwhile, in line with the planned disposal of its Ping stake, DNeX is likely to trim down its interests in its varied businesses by focusing on “cutting-edge” technologies.
This is where the story gets interesting.
Sources say that DNeX along with Singapore-listed Silverlake Axis Ltd are the front runners in a bid to buy into Theta Edge Bhd, an information technology company owned by Lembaga Tabung Haji (LTH).
It is understood that Silverlake’s offer entails a full buyout and general offer but the Theta Edge board has since turned down the offer.
One reason for that could be related to the fact that Silverlake is a foreign-listed company while Theta Edge is majority-owned (68.7%) by local pilgrim fund, LTH.
In the case of DNeX’s poposal, it is understood that the company wants to take less than a 33% stake by buying half of LTH’s stake.
If this materialises, LTH can then ride along with any upside that DNeX may bring into Theta Edge.
A source says that although DNeX’s offer price is slightly lower than Silverlake’s offer, the potential upside that it could possibly give to LTH is a compelling factor for the pilgrim fund.
What is also interesting is that DNeX is looking to inject its other oil and gas assets into another listed oil and gas company.
According to the source, this company could be Daya Materials Bhd.Meanwhile, with a potential payout from the sale of Ping estimated to be around RM250mil, DNeX is likely to pay out a total dividend of 14 sen per share, based on back of the envelope calculations.
Currently, the company gets a cash flow of some RM40mil per annum from its current businesses. According to the source, the company’s focus is to continue to pay out consistent dividends to shareholders.
This is partly the reason why the firm is looking at consolidating its various operations.
Ping sale poser
The main question now is will the sale of its stake in Ping, an upstream oil and gas firm, actually materialise?
Financial services outfit Jefferies International Ltd has reportedly been hired to do the deal while sources say the proposal could be completed by September and the payout to shareholders could happen in December.
Notably, Ping’s total proved and probable (2P) oil reserves stood at some 27 million barrels equivalent (MMboe) at the end of last year, some 20% increase compared to 23 MMboe in 2015 which was when the company made its 30% stake acquisition in Ping.
This is likely to make it a more compelling proposition.
In the case of DNeX’s plans for its IT business, this revolves around Theta Edge.
Formerly known as Lityan Holdings Bhd, Theta Edge is a loss-making company. For its first quarter ended March 31, Theta Edge’s net loss stood at RM3.7mil with a revenue of some RM8mil.
IT remains the company’s main revenue contributor with more than 79.6% of its revenue coming from this segment.
Its other revenue generator is its telecommunication services segment.
In its latest annual report, the company says it expects 2019 to remain “very competitive” with pricing to be the main factor for value proposition.
“With DNeX coming onboard, the idea is that execution can be better done at Theta Edge,” says another source.
DNeX was founded in 1970 as TIME Engineering Sdn Bhd, mainly to trade and distribute welding products.
Acquired by accounting software firm Censof Bhd in 2013, DNeX returned to the black in the financial year ended Dec 31, 2014, turning in a net profit of RM12.2mil against a net loss of RM6mil for the same period a year earlier helped by the provision of professional services for the implementation of GST integrated logistics portals.
Over the years, it has gone into various businesses including the IT, eServices and the energy sector.
According to its annual report, the group in 2018 recorded its highest revenue since 2007 with a year-on-year growth of 44% at RM293.5mil from RM203.9mil generated the previous year.
New revenue streams from its acquisition of Genaxis Group Sdn Bhd and first revenue from marine telecommunication cable installation, repair and maintenance services in Indonesian waters contributed to the better results, the report reads.
However, profit-wise, its performance suffered a little.
Net profit saw a 6% fall as a result of higher taxes (RM3.5mil), one-off impairment on goodwill (RM3.6mil), depreciation and amortisation charges (RM4.2mil).
At last look, shares of DNeX was at 26 sen, valuing the company at close to RM460mil.
To be sure, the value of its shares have more than halved from the 53 sen-level at the beginning of last year.
At its current price of 26 sen, it is trading at a trailing 12-month price-to-earnings ratio of about 14.41 times.
For the first quarter ended March 31, the company made a net profit of RM11.9mil compared with a net profit of RM16.2mil for the same period, a year earlier.
Revenue was also marginally lower at RM68.9mil against an earlier RM71.1mil.
In its annual report, DNeX says:”Moving forward DNeX will intensify its focus on the IT and eServices sector as the demand for technology continues to rise.
“As we try to maximise the use of our resources and assets in Energy, we may consider monetising investments that may yield attractive returns particularly investments with smaller shareholding and control.”
This statement appears to be in line with what the market is expecting the company to do this year.