DNeX on asset acquisition overdrive
Dagang Nexchange Bhd (DNeX), which ventured into the oil and gas (O&G) business following the 2014 oil market collapse, intends to use the current market conditions to its advantage.
By leveraging the very same company it wanted to dispose of two years ago, DNeX hopes to ride on the expected recovery in crude oil prices through asset acquisitions and increased production. Just a week earlier, the group proposed to purchase an additional 60% stake in Ping Petroleum Ltd, an upstream O&G company with eight producing oil wells in the North Sea, United Kingdom, at a 40% discount to market valuation.
Via this company, DNeX plans to acquire more marginal oil fields in the North Sea, Malaysia and within the region, from oil majors exiting such assets. It is noteworthy that DNeX announced a plan in 2019 to sell its 30% stake in Ping at a valuation of at least RM250mil. However, the group made a U-turn a year later and said it wanted to instead have a majority interest in Ping.
In an exclusive interview with StarBizWeek, group managing director Datuk Seri Syed Zainal Abidin Syed Mohd Tahir says the group is looking at acquiring two marginal oil fields. “Within the next couple of months, we will be submitting bids for three or four assets.
“Exxon, for example, has invited us to bid for oil fields not only in Malaysia but also in Indonesia and Thailand. We will also bid for oil fields from other oil majors in the Malaysian waters. “Ping is a reliable and low-cost crude oil producer and its production cost is only about US$18-US$19 per barrel. So, Ping has the capability and expertise to profitably operate these marginal oil fields, ” he says. Given the improved outlook, Syed Zainal Abidin said the group plans to increase the production capacity of Ping by another 10% to 15% daily. “Currently, we produce 300,000 to 305,000 barrels of crude per day. But through new technology and better efficiency, we can do much better by an additional 10% to 15% within the next one to two years, ” he says.
But can DNeX afford to make all these acquisitions? On Jan 22, DNeX entered into a conditional share sale and purchase agreement with the other shareholders of Ping to acquire an additional 60% stake in the upstream player, bringing its total equity to 90%. The acquisition will be undertaken at US$78mil (RM314.3mil), of which US$40.95mil (RM165mil) will be settled in cash and the remainder via issuance of new shares. DNeX intends to fund the cash portion through borrowings, which “may be procured from Ping in the form of inter-company loan”.
DNeX was asked whether it would be legal to use cash from the target company to fund its own acquisition. In response to this, it said it is working with solicitors in Malaysia, the UK and Bermuda to advise the group on the relevant laws, rules and regulations in these countries.
“The share sale and purchase agreement executed by DNeX contains several conditions precedent and its completion will be in accordance with the laws of Malaysia, the UK and Bermuda. “Typically though, shareholders of an asset being acquired would prefer for the cash in the company to be paid out to shareholders prior to the asset being sold, ” points out an analyst. But says Syed Zainal Abidin: “The transaction structure was carefully and comprehensively negotiated between the sellers, and DNeX and reflects a willing buyer-willing seller commercial arrangement.” The acquisition is expected to be completed by the second quarter of 2021, subject to the relevant approvals.
A look at DNeX’ balance sheet reveals that the group is in a net debt position of RM73.29mil. To be noted is that the company has just completed a private placement. It is unclear how much it has raised but the group did say it intended to raise RM77mil to RM110mil from the exercise. Syed Zainal Abidin says he envisions a more balanced business portfolio for DNeX, moving forward.
“The energy segment (after the acquisition of a 60% stake in Ping) has the potential to contribute 40% to 45% of our revenue, depending on crude oil prices. If the crude oil prices go beyond US$60 per barrel, the contribution will be higher. “The system integrator and consultancy segment would probably contribute 30% to 35%, ” he says, adding that the remaining contribution would come from the trade facilitation business. In comparison, in the financial year 2019, the energy segment contributed only 20% of its revenue, while the remaining 80% came from trade facilitation as well as system integrator and consultancy. Malaysia’s National Single Window (NSW) system, launched by the government in 2009, is the backbone of DNeX’s trade facilitation business, carried through its subsidiary Dagang Net Technologies Sdn Bhd.
The NSW is a one-stop system that links the trading community with relevant government agencies and various other trade and logistics parties for import and export activities. Via this system, customs clearance procedures are simplified, electronic exchange of trade-related data is facilitated and costs of doing business are reduced. The contract renews every two years, and hence exposing DNeX to the possibility of losing the project to another competitor. The contract will be expiring on Aug 31 this year but Syed Zainal Abidin says he has received “verbal advice” from the government for its extension.
“The new uCustoms system has been put on hold by the government. We have yet to know what is the new direction. “So, this automatically means that our current NSW contract will be extended, perhaps for a minimum of two years. However, we have yet to receive black and white confirmation from the government. “Moving forward, we do not want to rely extensively on the NSW alone, ” he says.
Another component of DNeX’s trade facilitation business is the SealNet portal, which provides total cargo and trade management services. Syed Zainal Abidin says the SealNet will be relaunched this year, with more aggressive marketing efforts. Looking ahead, Syed Zainal Abidin has plans to expand Dagang Net and SealNet services within Asean, starting with Thailand and Indonesia this year. “Whatever solutions we have, we also want to share them with our partners in these countries, ” he says. Syed Zainal Abidin also spoke on the plans to grow the system integrator and consultancy segment.
An important contract under this segment is the integrated Government Financial and Management System (iGFMAS), which DNeX developed and currently manages for government agencies. “We want to use this expertise and experience to participate in a few more major government contracts and we are already talking to a few ministries. “In addition, we would also want to penetrate the private sector and offer solutions under this segment to businesses, ” he says.
Syed Zainal Abidin points out that DNeX’s revenue currently is predominantly contributed by government-related projects. Meanwhile, responding to a question on the group’s plan to acquire Silterra Malaysia Sdn Bhd, a loss-making semiconductor wafer foundry wholly-owned by Khazanah Nasional Bhd, Syed Zainal Abidin says DNeX, together with its partner, has a three-year turnaround plan for Silterra.
“If you look over the next five years, the demand for the semiconductor industry will continue to increase and Silterra is very key in the semiconductor industry. “Our partner, Beijing CGP Investment Co Ltd, has a stable of companies in the semiconductor and chip industry and this would provide Silterra with access to the market, ” he says. If it is successful in its bid, DNeX will hold a 60% stake in Silterra. However, questions remain as to how DNeX can afford to acquire Silterra, considering its current balance sheet, coupled with its planned acquisition of Ping Petroleum.
DNeX has said that it is currently considering various options to fund the acquisition of Silterra. DNeX, along with local firm Nuglobal Ventures Sdn Bhd (NGV), are the front runners for Silterra. Previous articles, which speculated that DNeX was in the running to acquire Silterra, have pegged their offer price at RM240mil for a 100% stake in Silterra, in which it will hold a 60% stake and its partner Beijing CGP Investment Co Ltd the remaining 40%.
In comparison, it is speculated that NGV’s bid for Silterra comes with two options. The first is an offer of RM270mil with effective local ownership of 55%, while the second is an offer of RM335mil with the flexibility of future new capital injection from both local and foreign investors to address Silterra’s business expansion needs and to stay competitive globally.
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