In the short-to-midterm, DNeX’s growth will be underpinned by rising Silterra’s net ASP/wafer and elevated crude oil prices. Also, with DNeX’s new Avalon greenfield up and coming in July 2024 (FY25) which would potentially quadruple Ping Petroleum’s current output and its recent MoU with Foxconn to develop a new 12-inch wafer fab to support its EV ventures, we are excited and upbeat about the group’s growth prospects in the coming years. We highlight at current levels, DNeX is trading at bargain valuation multiples of only 11x and 9x for FY23-24f respectively in its entirety – based on our conservative earnings forecast. While timing a perfect entry point may be difficult to do, we believe that DNeX is currently trading at unwarranted levels given its luminous growth prospects. We maintain our BUY call on DNeX with an unchanged SOP-derived TP of RM1.69/share.

Results recap. Recall that DNeX registered a core PATAMI of RM51.7m in 3QFY22, bringing 9MFY22 core PATAMI to RM144.4m – having adjusted for: (i) RM264.5m gain from the acquisition of Silterra; (ii) RM11.5m impairment loss on receivables; and (iii) RM8.4m on forex losses. The group’s strong performance throughout the quarter was mainly attributed to: (i) Silterra’s strong net ASP/wafer; and (ii) encouraging realised price of USD103/bbl (vs. USD71/bbl in 2QFY22). However, we highlight that the outperformance throughout the quarter was pretty-much masked by a higher tax expense of RM32.0m – which mainly stems from Ping Petroleum due to an exercise to streamline the unit’s tax and deferred tax expense to be more spread out over multiple quarters.

Share price downturn in recent months. From an all-time high of RM1.33/share on 17 Feb 2022, DNeX’s share price has plummeted by about 42% to its current price of RM0.765/share despite its strong recent quarterly earnings performance. We believe that this was due to a few key broad-base factors which has affected the stock market tremendously in recent months: (i) US Fed’s quantitative tightening measures which has led to higher interest rates and cost of borrowing – to lower demand for goods and services across the board in hopes of combating inflationary pressures; and (ii) market fears of a global synchronised economic recession.

Bright growth prospects. In the short-to-midterm, DNeX’s growth will be underpinned by rising Silterra’s net ASP/wafer and elevated crude oil prices. Also, with its new Avalon greenfield up and coming in July 2024 (FY25) which would potentially quadruple Ping Petroleum’s current output and its recent MoU with Foxconn to develop a new 12-inch wafer fab to support its EV ventures, we are excited and upbeat about DNeX’s growth prospects in the coming years.

Now at bargain valuations as a tech name. We highlight that at current levels, DNeX is trading at a bargain forward valuation multiples of only 11x and 9x for FY23- 24f respectively in its entirety – based on our conservative earnings forecast. While we note that with guidance and expectations of further rate hikes from the US Federal Reserves in 2H22, we believe that the tech sector may bear the brunt of trading volatilities in coming months and DNeX will not be exempted from this broad-base selloff. While timing a perfect entry point may be difficult to do, we believe that DNeX is currently trading at unwarranted levels given its luminous growth prospects.

Forecast. Unchanged.

Maintain BUY, unchanged TP: RM1.69/share. We maintain our BUY call on DNeX with an unchanged SOP-derived TP of RM1.69/share. Currently at about 11x 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 - 21 Jun 2022