DNeX recorded 2QFY23 core net profit of RM26.7m (-37% QoQ, -53% YoY) and 1HFY23 core net profit of RM69.0m (-18% YoY) – which came in below expectations at 40%/35% of ours/consensus full-year forecasts respectively due to (i) a larger-than-expected dip in Silterra’s profits – largely caused by inventory flushing happening sector-wide globally; and ii) the higher tax rates on Ping Petroleum’s books arising from the Energy Profit Levy (EPL) in the UK. We believe that Silterra may still face some challenges in 3QFY23 due to inventory adjustments by its LTA clients and relatively lower utilisation rates (sector-wide globally) but based on our understanding, the operating environment should stabilise and improve in 4QFY23. Post-revision of Silterra’s earnings forecast and Ping Petroleum’s tax rates, we maintain our BUY call on DNeX with a slightly lower SOP-derived TP of RM1.03/share.

Missed expectations. DNeX recorded a 2QFY23 core net profit of RM26.7m (-37% QoQ, -53% YoY) and 1HFY23 core net profit of RM69.0m (-18% YoY) – after having adjusted for RM4.6m of write back on the provision of receivables. We deem the results to be below expectations at 40%/35% of ours/consensus full-year forecasts respectively. Key variance against our forecast was due to: (i) larger-than-expected dip in Silterra’s profits – largely caused by inventory flushing happening 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.

QoQ. Core net profit dipped by 35% QoQ due to three main reasons: (i) lower wafer shipment throughout the quarter by about 50% – caused by inventory flushing happening sector-wide globally; (ii) lower realised crude oil price of USD83/bbl for Ping Petroleum in 2QFY23 (vs. USD97/bbl in 1QFY23); and (iii) higher Ping Petroleum’s tax rates arising from higher profitability due to riser reinstatement together alongside the EPL regime in the UK. However, we highlight that net ASP/wafer was up flattish QoQ due to an improved product mix, based on our estimates.

YoY/YTD. Core net profit was down 53% YoY and 18% YTD due to: (i) an approximately 50% drop in wafer shipments in 2QFY23, based on our estimates; (ii) higher Ping Petroleum’s tax rates arising from the higher profit in 2QFY23 together with the EPL regime in the UK.

Outlook. We believe that Silterra may still face some challenges in 3QFY23 due to inventory adjustments by its LTA clients and relatively lower utilisation rates (sector wide globally) but based on our understanding, the operating environment should stabilise and improve in 4QFY23. We see clearer skies ahead for Silterra in FY24f as well. 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 23%, 15% and 19% respectively to account for: (i) lower wafer shipment assumptions for Silterra; and (ii) adjustments in Ping Petroleum’s tax rate to 60% (from 40% previously) to account for the impact of EPL on its Anasuria asset.

Maintain BUY, TP: RM1.03/share. Post-revision of Silterra’s earnings forecast and Ping Petroleum’s tax rates, we maintain our BUY call on DNeX with a lower SOP derived TP of RM1.03/share (from RM1.08/share previously) – pegging Silterra at a multiple of 18x – at parity to TSMC’s 3-year average forward multiple. DNeX is currently trading at about 10x revised FY24f earnings in its entirety.

Source: Hong Leong Investment Bank Research - 21 Feb 2023