DNeX posted 1QFY23 core net profit of RM42.3m (-35% QoQ, +51% YoY) – which came in below expectations at 18% of both ours and consensus full-year estimates. Key variance against our forecast was due to a dip in Silterra’s profit margins by more than 10ppts – largely caused by inventory flushing, elevated material costs and higher operating expenses throughout the quarter. We believe that Silterra may still face some challenges in 2QFY23 due to inventory adjustments by its LTA clients but based on our understanding, the operating environment should stabilise and improve in 2HFY23. Post-revision of Silterra’s earnings forecast and Ping Petroleum’s production schedule, we maintain our BUY call on DNeX with a lower SOP-derived TP of RM1.08/share (from RM1.32/share previously).

Below expectations. DNeX posted 1QFY23 core net profit of RM42.3m (-35% QoQ, +51% YoY), which came in below expectations at 18% of both ours and consensus full-year estimates. Key variance against our forecast was due to a dip in Silterra’s profit margins by more than 10ppts – largely caused by inventory flushing, elevated material costs, and higher operating expenses throughout the quarter.

Dividend. None declared for the quarter, as expected.

QoQ. Core net profit dipped by 35% QoQ due to four main reasons: (i) Silterra’s margin squeeze in 1QFY23; (ii) lower wafer shipment; (iii) lower realised crude oil price of USD97/bbl for Ping Petroleum in 1QFY23 (vs. USD117/bbl in 4QFY22); and (iv) lower offtake volume of 143.7k bbl (vs. 163.0k bbl in 4QFY22). However, we highlight that net ASP/wafer was up in the range of 5-10% QoQ due to an improved product mix – based on our estimates.

YoY. Core net profit was up 51% YoY due to: (i) an approximately 50% jump in net ASP/wafer – based on our estimates; (ii) the completion of Silterra’s acquisition only came in on 26 July 2021 – meaning there were only about 2 months of profit recognition for the unit in 1QFY22; and (iii) higher realised crude oil price of USD97/bbl for Ping Petroleum in 1QFY23 (vs. USD76/bbl in 1QFY22).

Outlook. We believe that Silterra may still face some challenges in 2QFY23 due to inventory adjustments by its LTA clients and relatively lower utilisation rates but based on our understanding, the operating environment should stabilise and improve in 2HFY23. We note that DNeX has secured another LTA with a US-based customer for its SiP products. We look forward to more developments regarding the group’s recent MoU with Foxconn to develop a new 12-inch wafer fab to support its EV ventures.

Forecast. We lower our FY23-25f net profit forecasts by 25%, 15% and 10% respectively to account for: i) lower wafer shipment assumptions for Silterra; and ii) adjustments in Ping Petroleum’s production schedule.

Maintain BUY, TP: RM1.08/share. Post-revision of Silterra’s earnings forecast and Ping Petroleum’s production schedule, we maintain our BUY call on DNeX with a lower SOP-derived TP of RM1.08/share (from RM1.32/share previously). At about 11x revised 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 - 29 Nov 2022