Yesterday, DNeX hosted an analyst briefing after announcing that an SPV of CGP, Tethystronics Technologies Company Limited (TTCL) decided to commence an arbitration proceeding against DNeX Semiconductor and SilTerra. We understand that this development came on the heels of the appointment of 4 new Board of Directors into SilTerra by DNeX. We are taking the opportunity to reduce Silterra’s P/E multiple to 15x (from 20x) and with that, we maintain BUY on DNeX with a lower TP of RM0.93/share (from RM1.08/share previously).

Yesterday, DNeX hosted an analyst briefing after announcing that an SPV of CGP, Tethystronics Technologies Company Limited (TTCL) decided to commence an arbitration proceeding against DNeX Semiconductor and SilTerra. We understand that this development came on the heels of the appointment of 4 new Board of Directors into SilTerra by DNeX.

The backstory. From the announcement, we understand that (i) unless otherwise unanimously agreed upon by CGP and DNeX in writing, SilTerra’s Board shall consist of not more than 5 directors and the composition of the board shall be mutually agreed upon by both parties in writing and (ii) SilTerra’s Board shall at all times comprise of 2 persons appointed by DNeX and 3 persons appointed by CGP. From the analyst briefing hosted, we highlight that DNeX has appointed 4 new directors into SilTerra’s board.

CGP’s demands. From the announcement, we understand that CGP is demanding that the appointment of the additional directors be illegal, invalid, null, void and/or unenforceable. The announcement also stated that DNeX and its subsidiaries have legal authority and basis to appoint additional directors and the appointment of the 4 new directors is in accordance with the prevailing terms of the Constitution.

Briefing highlights. DNeX’s management mentioned that this development does not/will not impact SilTerra’s ongoing operations as it is an issue involving the Board – making it ambiguous to put a quantitative impact (if any) on SilTerra’s earnings forecast based on this development. We think that both arbitrations are reasonable and with equitable ways for both parties to resolve the underlying issues in an amicable manner.

Forecast. Unchanged.

Reducing our multiple for Silterra due to the uncertainties arising from the cross-arbitrations within a month. We are taking the opportunity to reduce Silterra’s P/E multiple to 15x (from 20x) – still at a premium to TSMC’s current forward multiple of 13x to reflect the scarcity premium of a listed wafer fab foundry in the local stock exchange.

Maintain BUY, TP: RM0.93/share. We maintain our BUY call on DNeX with a lower SOP-derived TP of RM0.93/share (from RM1.08/share previously) after reducing Silterra’s target P/E multiple to 15x (from 20x previously).

Source: Hong Leong Investment Bank Research - 16 Dec 2022