We came away feeling positive from a private meeting with DNeX during our site visit to Silterra’s wafer foundry earlier this month. We strongly believe DNeX should register uninterrupted back-to-back quarterly earnings growth over the next 6-9 months on the back of: (i) Silterra’s surging product ASPs, (ii) increasing wafer shipments; and (iii) soaring crude oil prices. We highlight that DNeX would be a major direct beneficiary of higher oil prices amidst the Ukriane-Russia conflict via its oil-producing assets in 90%-owned Ping Petroleum. We maintain our highly-convicted BUY recommendation with an unchanged SOP-based TP of RM1.64/share. Currently at only about 15.5x FY23F earnings in its entirety, we believe that DNeX is a compelling case given its strong foothold in both front-end semiconductor and upstream energy.

2Q/1HFY22 results recap. DNeX registered a record high quarterly core PATAMI of RM62.5m in 2QFY22, bringing 1HFY22 core PATAMI to RM92.7m (having adjusted for RM264.5m gain from the acquisition of Silterra, RM11.4m impairment loss on receivables and RM8.4m on forex losses). The group’s strong performance was mainly attributed to Silterra’s strong net ASP per wafer at USD527 in 2QFY22 (+8% QoQ from USD488 in 1QFY22).

Indications leading to an explosive 3QFY22. From our check with management, we gather that wafer ASPs continues to increase. The group has reiterated that net ASP per wafer is still on an uptrend and is expected to peak in 4QFY22 and hover at c.USD600 to USD625 in FY22-23. Meanwhile, soaring crude oil prices throughout 3QFY22 would also directly benefit its 90%-owned Ping Petroleum via its oil producing assets in Anasuria. As at point of writing, Brent Crude Oil price averaged at about USD96/bbl YTD, which is significantly higher than its 2QFY22 realised price of USD71/bbl.

Planning for another USD150-200m capex for Silterra for an extended plant in end-CY2022. We highlight that the group is planning for another expansionary capex of USD150-200m in end-CY2022 to ramp up its production for emerging technology (MEMS, Silicon Photonics) to about 10% of total capacity. This capex will entail a new building, which would be an extension from Silterra’s existing plant in Kulim currently. The group aims for this new plant to be operational in early-2024.

Ping Petroleum’s 100%-owned Avalon Oilfield to produce first oil in July 2024 (FY25). The group is targeting for Ping’s 100%-owned Avalon Oilfield (greenfield) to produce its first oil in July 2024. Based on our findings, we gather that the Avalon Oilfield will potentially more than quadruple (4x) Ping’s output from c.2.3k boepd to c.9.0-10.5k boepd, based on our internal estimates – which would boost Ping’s earnings by 3-4x.

Forecast. Unchanged. We maintain our conservative assumption of: (i) net ASP per wafer to be at USD500 for FY22; USD550 for FY23; and USD578 for FY24. We also maintain our Brent oil price forecast of USD80/bbl for FY22 (FYTD: USD82/bbl). Note that we are conservative on our assumptions for both of the group’s divisions – indicating significant upside risks to our earnings forecasts.

Maintain BUY, TP: RM1.64/share. We maintain our highly-convicted BUY recommendation on DNeX with an unchanged SOP-derived TP of RM1.64/share. We peg Silterra’s multiple to 30x PE to reflect the monumental growth prospects for the semiconductor foundry over the next few quarters. Currently at only about 15.5x FY23F earnings in its entirety, we believe that DNeX is a compelling case given its strong foothold in both the front-end semiconductor and upstream energy spaces.

Source: Hong Leong Investment Bank Research - 25 Mar 2022