2Q22 earnings recap. DNEX's 2Q22 core net profit of RM26.7m (-37% QoQ, -53% YoY) brought 1H22 earnings to RM69.9m (-18% YoY), missing both ours and consensus expectations. The weak performance was primarily due to (i) larger-than expected dip in Silterra’s profits – largely caused by inventory adjustment sector-wide globally; and (ii) the higher tax rates on Ping Petroleum’s books arising from higher profitability due to riser reinstatement in tandem with the Energy Profit Levy (EPL) regime in the UK. To recap, Silterra's profits slipped 13% QoQ amid global inventory adjustment which resulting a c.50% plunge in wafer shipments throughout the quarter. The negative impact was marginally cushioned by a 359% surge in Ping Petroleum's PBT due to higher production post-subsea riser reinstatement despite a lower average oil realized price.  

Earnings to rebound from 4Q23. We anticipate that Silterra may face challenges in 3QFY23 due to inventory adjustments by its LTA clients and lower utilisation rates across the global sector. However, we believe the operating environment will stabilise and improve in 4QFY22, taking cue from management's view that the lacklustre wafer shipment volume is only a temporary setback with volumes expected to gradually pick up in 3Q-4QFY22 due to the commitments from its LTA customers. In the event that the recovery in wafer shipments is lower than expected, management has a contingency plan to grow the emerging technology segment, in which ASPs are estimated to be 3x higher than their core technological products. Management has recently signed an LTA with a US-based customer, bringing the total number of LTA customers to four.  

We expect DNEX to post better earnings in the coming quarters, based on (i) gradual improvement in Silterra's business; (ii) the sustainable high production efficiency of Ping Petroleum (>90%); and (iii) the resilient showing of its IT segment. Hence, we reckon that the worst is likely over for DNEX, reflected by the 49% plunge in its share price from its 52-week high of RM1.18.  

Trading at critical support. Technically, DNEX is trading at the physiological support level of RM0.60, with indicators on the mend. A successful breakout above the stiff resistance of RM0.64 will spur a greater upside toward RM0.69-0.72-0.80 levels. Cut loss at RM0.54.

Source: Hong Leong Investment Bank Research - 3 Mar 2023