The background. Dragged by the lingering concern over the possible revocation of Silterra’s license, DNEX experienced a knee-jerk sell-down last Friday. To recap, DNEX and CGP Fund (CGP) entered a Share Sale and Purchase Agreement (SSPA) with Khazanah Nasional Berhad in 1Q22 to acquire Silterra for RM273m, with a shareholding structure of 60:40, respectively. Under Schedule 4(I) of the SSPA, DNeX and CGP have committed to a capital injection of RM200m by way of subscribing for new ordinary shares to be allotted and issued by SilTerra. Of the options discussed for DNEX’s portion (RM120m), the parties had sought to opt for the possible issuance of ICPS in DNeX Semi amounting to RM100m to be issued to and subscribed by MIMAS –an entity owned by CGP. Such issuance of ICPS will result in MIMAS becoming 33.33% shareholder of DNEX Semi once it is converted, resulting in CGP holding >55% of Silterra, which breaches the 55% shareholding threshold set by MITI.  

Though it may take some time for the issue to be ironed out, the likelihood of Silterra breaching MITI’s “55% Malaysia entity” regulation is highly unlikely, as we gather that there will be no subscription exercise that would lead to CGP being a 33.3% shareholder in DNEX Semi –ICPS was not issued. Also, considering Silterra is a valuable asset, there is no reason for the shareholders to mess up its operating licence.

Where is the bottom? To recap, stripping out Siltera’s entire valuation out of DNeX would slash our TP to RM0.47. Hence, the 33% plunge to RM0.50 last Friday has pretty-much priced in the “worst-case scenario” –which is an unlikely outcome. All in, we reiterate a BUY call on DNEX with a TP of RM1.32, which implies 131% upside.

Brace for a rebound. As “the worst-case scenario” has pretty much priced, we see limited downside in DNEX, thus advocating buying the dip in anticipation of a further oversold rebound. A convincing breakout above RM0.58 should lift prices higher to RM0.65-0.70-0.72 going forward. Cut lost at RM0.44.

Source: Hong Leong Investment Bank Research - 22 Nov 2022