We initiate coverage on DNeX with a highly convicted BUY recommendation and TP of RM1.35/share based on sum-of-parts (SOP) valuation. We peg its technology segment to a CY23F P/E of 25x, which is at a slight discount to its global peers weighted average forward P/E of 26x. While we understand that SilTerra is a relatively small player in this space and has a relatively promising technology vs. its listed global peers, we believe that valuation is justified as we are expecting SilTerra to grow faster than peers, with a growth of 28% (vs. a weighted average of 23% for its global peers). At about 14x FY23F earnings in its entirety, we believe that DNeX is a compelling case given its strong foothold in both the semiconductor and energy spaces.

A star is born. Following a slew of corporate exercises in 1HCY21 that ushered in a new management team and business direction, DNeX has transformed itself into both a semiconductor front-end player / foundry and an upstream oil and gas producer in the UK North Sea region. We deem the group’s historical financial performance to be a premature representation of its future performance as the group has ushered in a new 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.

SilTerra turned into the black with strong growth trajectory ahead. Based on our findings, we understand that SilTerra Malaysia registered loss-after-tax (LAT) of -RM20.2m, -RM172.1m and -RM64.6m in FY18-20, respectively. Post-acquisition by DNeX and CGP, we highlight that SilTerra has turned into the black, registering profits of RM21.2m in merely 2 months (Aug-Sept 2021). We are projecting SilTerra’s FY22- 24F net profit to grow further to RM158.6m, RM202.3m and RM223.0m, respectively, representing a FY22-24F CAGR of 19%. Going forward, the group also aims to venture into a vertically enhanced product mix i.e. Silicon Photonics and MEMS, which will improve profit margins by 3x.

Anasuria assets are valuable cash cows. With low operating expense per barrel (opex/bbl) of less than USD20, we estimate the unit’s cash-breakeven crude oil price to be at about USD25 per barrel – based on our calculations. In the event of an oil price crash, we are comforted by the fact that these low cash opex levels to provide shelter from going into deep operating loss. With that, we deem the Anasuria assets to be a valuable cash cow. Meanwhile, we estimate the unit’s breakeven price to be at about USD45 per barrel on the net level.

Impressive earnings growth. We are projecting DNeX’s core PATAMI to grow to RM155.2m, RM197.8m and RM271.5m for FY22-24F respectively, representing a CAGR of 32% (Figure #11-12). This will be driven by: (i) the 60% acquisition of SilTerra which was completed in July 2021; (ii) ASP hikes by SilTerra; (iii) increased stake in Ping Petroleum to 90% (from 30% previously) – which will consolidate Ping’s financial performance into the group’s as it is now a subsidiary; and (iv) increasing oil production from the Ping’s 50%-owned Anasuria.

Initiate with a BUY, TP: RM1.35/share. We initiate coverage on DNeX with a highly convicted BUY recommendation and a SOP-derived TP of RM1.35/share. At about 14x FY23F earnings in its entirety, we believe that DNeX is a compelling case given its strong foothold in both the semiconductor and upstream energy spaces.

Source: Hong Leong Investment Bank Research - 19 Jan 2022