We remain ecstatic and upbeat about DNeX’s prospects as we are convinced that it should register uninterrupted back-to-back quarterly earnings growth over the next 12 months on the back of: (i) SilTerra’s surging product ASPs, (ii) increasing wafer shipments; and (iii) higher realised prices for Ping Petroleum due to soaring Brent crude oil prices. At only about 16x FY23F (FYE June) earnings in its entirety, we believe that DNeX is a compelling case given its strong foothold in both the front-end semiconductor and upstream energy spaces. We maintain our highly convicted BUY recommendation for DNeX with a TP of RM1.35/share based on sum-of-parts (SOP) valuation.

Possibility of two more LTAs. From our checks through the grapevine, we gather that DNeX could be in the running to secure two more long-term agreements (LTAs), possibly in 1QCY22. Based on our understanding, it would be somewhat similar to contracts that the group has nailed with ChipOne Technology and ILI Technology (Ilitek), where DNeX will be entering into a multi-year long-term wafer supply agreement with its clients. Currently, both the existing LTAs with ChipOne and Ilitek is taking up 65% of SilTerra’s capacity and from recent news flows, we gather that the group is planning to have c.80% of its capacity tied to LTAs.

No equity fundraising required for SilTerra’s RM645m capex. DNeX has publicly announced that SilTerra will be investing a total of RM645m in CY22 on an expansion plan to boost its annual capacity by 20% to 10m mask layers. Based on our check with the group’s management, we understand that there will be no equity fundraising required to finance this capex. The capex will be funded by the DNeX-CGP consortium and also internally-generated cash flows.

Strong upcoming 2QFY22 results. DNeX’s 2QFY22 results are tentatively scheduled for release on 25 Feb. We expect core earnings for the quarter to be significantly stronger QoQ (vs. 1QFY22 core earnings of RM30.2m) attributed to: (i) a full-quarter profit contribution from SilTerra (vs. only 2 months in 1QFY22); and (ii) significantly higher Brent Crude Oil spot prices, averaging at USD80/bbl in 2QFY22 (vs. USD73/bbl in 1QFY22). Note that YoY earnings comparison will not be meaningful as the group has an entirely different management team along with the acquisitions of new assets (i.e. 60% of SilTerra on 26 July 2021 and an additional 60% of Ping Petroleum on 30 June 2021) – of which profits would only be reflected in FY22 onwards.

Outlook. We are convicted that DNeX should register uninterrupted back-to-back quarterly earnings growth on the back of: (i) Silterra’s surging product ASPs, (ii) increasing wafer shipments; and (iii) higher realised prices for Ping Petroleum due to soaring Brent crude oil prices.

Forecast. Unchanged. We highlight that the risk is tilted towards the upside for our earnings forecast as we have conservatively assumed: (i) net ASP per wafer to be at USD500 for FY22; USD550 for FY23; and USD578 for FY24; and (ii) Brent Crude Oil price assumption of USD70 for FY22 and USD65 for FY23. YTD FYE June, Brent Crude Oil price averaged at USD78/bbl (1 July 2021 – 9 February 2022).

Maintain BUY, TP: RM1.35/share. We maintain our BUY recommendation on DNeX with a SOP-derived TP of RM1.35/share. At only about 16x FY23F earnings in its entirety, we believe that DNeX is a compelling case given its strong foothold in both the front-end semiconductor and upstream energy spaces.

Source: Hong Leong Investment Bank Research - 10 Feb 2022