Undemanding valuation. Weighed by the global technology stock sell-down and the imposition of an additional 25% windfall tax to oil and gas producers in the British North Sea, DNEX share price has corrected 38.3% from a 52-week high of RM1.33 to RM0.82 yesterday. With this, DNEX is currently trading at an undemanding 11.9x FY23 P/E, which is 65% lower than KLTEC’s 5-year average of 34.2x. This discount is unwarranted in our view, given DNEX being the only listed-co on Bursa Malaysia involved in both E&P and wafer manufacturing (Oil+Tech proxy). As such, we advocate buying on dip with a fair value of RM1.69.

Growth remains intact. While the additional 25% windfall tax to oil and gas producers in the British North sea will impact Ping Petroleum in the way of higher tax expenses, the impact will be partially offset by the new 80% investment allowance (#Figure1;

source). On top of that, factors such as higher oil prices (upcoming review period average: USD112 vs 2QFY22 realized prices: USD103.1) and the depreciating ringgit (upcoming review period average: 4.35 vs 2QFY22: 4.19) will partially offset the higher taxes as well. On Siltera, ASPs per mask layer is anticipated to stay on a rising trajectory, and management expects it to hit USD25 by the end of 2022 (vs 2QFY22: USD23.6) due to the ongoing chip shortage. Thus, after considering the abovementioned factors, we think DNEX is on track to post commendable earnings. In the next couple of years, we are even more excited and upbeat about DNEX’s prospects, underpinned by (i) the commercialisation of the Avalone field and (ii) Siltera’s new capacity kicks in. The former will quadruple Ping Petroleum’s current output in FY25, while the latter will increase Siltera’s capacity to 10m mask layers in FY23 (from 8.8m mask now) for emerging technology whose ASPs is 3x higher than their core products. All in, we are projecting DNEX’s core net profit to register a strong FY22-24 CAGR of 18%.

Pending a rectangle breakout. Technically, DNEX is poised for a rectangle breakout after hovering near its strong support area of RM0.75-0.76. A successful breakout above RM0.83 will spur the prices toward RM0.91-1.00-1.10 level, creating a new uptrend leg. Cut loss at RM0.70.

Source: Hong Leong Investment Bank Research - 2 Aug 2022