KUALA LUMPUR (Feb 10): Hong Leong Investment Bank (HLIB) Research said it remains upbeat on Dagang NeXchange Bhd’s (DNeX) outlook as the company’s semiconductor division SilTerra is seeing higher product average selling prices (ASPs) and increasing wafer shipments while its petroleum division Ping Petroleum has higher realised prices due to surging Brent crude oil prices.

In a note on Thursday (Feb 10), HLIB analysts Tan J Young and Jeremie Yap wrote that they are convinced that DNeX could register uninterrupted back-to-back quarterly earnings growth over the next 12 months and has maintained their “buy” call on the stock with a target price of RM1.35, which represents a 32.4% upside from RM1.02 at the time of writing.

“At only about 16 times financial year ending June 30, 2023 (FY23) forecast 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.

“We maintain our [strong] 'buy' recommendation for DNeX with a target price of RM1.35/share based on sum-of-parts (SOP) valuation,” they said.

The analysts added that based on their channel checks, DNeX could be in the running to secure two more long-term agreements (LTAs) which are similar to the multi-year long-term wafer supply agreements that the group has previously secured with ChipOne Technology and ILI Technology (Ilitek) in the first quarter of calendar year 2022 (1QCY22).

“Currently, both the existing LTAs with ChipOne and Ilitek are taking up 65% of SilTerra’s capacity and from recent news flows, we gather that the group is planning to have circa 80% of its capacity tied to LTAs,” Tan and Yap wrote.

HLIB Research is also not expecting DNeX to tap into private placements or share sales to raise funds for SilTerra’s RM645 million capital expenditure (capex) investment in CY22 based on information from the group’s management.

The capex will be deployed to boost SilTerra’s annual capacity by 20% to 10 million mask layers while being funded completely by DNeX-CGP consortium and also internally-generated cash flows.

On its upcoming second quarter ended Dec 30, 2021 (2QFY22) results report which is tentatively scheduled for release on Feb 25, HLIB Research said it expects core earnings for the quarter to be significantly stronger on a quarter-on-quarter basis as compared to its 1QFY22’s core earnings of RM30.2 million.

HLIB Research analysts said a full quarter profit contribution from SilTerra and significantly higher Brent crude oil spot prices are catalysts for its upcoming earnings.

It added that a year-on-year (y-o-y) comparison is not meaningful as the group had seen a change in management as well as the acquisition of new assets.

“Note that y-o-y earnings comparison will not be meaningful as the group has an entirely different management team along with the acquisitions of new assets (i.e. 60% of SilTerra on July 26, 2021 and an additional 60% of Ping Petroleum on June 30, 2021) — of which profits would only be reflected in FY22 onwards,” the report wrote.

Meanwhile, HLIB Research highlighted that its earnings forecast for DNeX was unchanged as the risk is tilted towards the upside as it has conservatively assumed that the net ASP per wafer to be at US$500 (RM2,092.50) for FY22, US$550 for FY23, and US$578 for FY24; Brent crude oil to average at US$70 for FY22 and US$65 for FY23.

At the time of writing, DNeX shares were up one sen or 0.98% to RM1.03, giving the company a value of RM3.22 billion based on 3.16 billion outstanding shares.