KUALA LUMPUR (June 22): Dagang NeXchange Bhd's (DNeX) shareholders have given the stamp of approval for the group's expansion drive.

This time around, it is to acquire an additional 60% in North Sea O&G production outfit Ping Petroleum Bhd for US$78 million (RM314.3 million).

DNeX shareholders voted for the proposed acquisition at its extraordinary general meeting last Friday, just weeks after its consortium received the nod to take over loss-making SilTerra Malaysia Sdn Bhd for RM273 million cash in the heat of the semiconductor boom.

Against the backdrop of declining profit over the past five years, the acquisition spree to cultivate earnings growth may give comfort to shareholders on its future prospects. On the flip side, the minority shareholders may also have concerns about the significant dilution that they will have to experience as DNeX is issuing shares to fund its acquisitions.

The additional 60% acquisition of Ping will increase DNeX's stake in the upstream player to 90%. DNeX will settle the purchase price by US$40.95 million cash (RM165 million) and issuance of up to 360 million new DNeX shares and preference shares for US$37.05 million (RM149.3 million).

DNeX bought the initial 30% stake in Ping for US$10 million in 2016.

The acquisition of SilTerra, meanwhile, will cost DNeX some RM163.8 million for its 60% portion in the consortium with Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Centre (CGP Fund) owning the remaining 40% stake.

On top of that, the consortium has agreed to inject RM200 million into SilTerra after it has taken over the semiconductor foundry firm, of which DNeX's portion is RM120 million. In total, DNeX will spend RM283.8 million on its portion in SilTerra for now.

Again, the acquisition will be settled by issue of new shares. For that, DNeX intends to issue up to 891.61 million shares to raise up to RM641.96 million — of which around RM300 million is for future expansion.

Overall, DNeX is expected to raise up to RM433 million via issuance of up to 1.2 billion new shares to part-fund the acquisitions of SilTerra and Ping Petroleum.

It is worth noting that the group currently has 506.15 million outstanding call warrants (DNeX-WD) expiring on July 30, 2021 at an exercise price of 50 sen apiece. The warrant last traded at 30.5 sen on Monday. In comparison, shares of DNeX last traded at 83 sen apiece.

Should investors convert all the outstanding warrants, DNeX will be able to raise an additional RM253 million.

This means DNeX will have a war chest of roughly RM680 million, if not more, and that will put the company in a net cash position.

The company's existing issued share capital stands at 2.9 billion shares, and that has already expanded from 1.76 billion in August last year following a series of placements as well as conversion of its warrants.

With the additional warrant conversion plus the proposed private placements, DNeX's share base may balloon by over 60% to 3.9 billion.

For SilTerra, the task is at hand for DNeX to turn around the company, which reported a net loss of RM172 million in its financial year ended Dec 31, 2019 (FY19).

As an interesting twist to the takeover of SilTerra, chipmaker Foxconn Technology Group emerged as a substantial shareholder with a 5.03% stake earlier this month.

To recap, Foxconn bought the 120 million shares for RM108 million or 90 sen per share. The Taiwanese chipmaker was one of the bidders of SilTerra when Khazanah Nasional Bhd was inviting offers.

Foxconn is unlikely to be keen on DNeX's other core businesses. Hence, many in the investing fraternity expect Foxconn to take a substantial stake in DNeX's subsidiary which will hold a 60% equity interest in SilTerra.

DNeX held an investor briefing this week. However, minority shareholders do not know what was revealed at the conference call.

For the group's oil and gas (O&G) business, the acquisition of Ping comes at a time when oil prices are heading higher, and as certain O&G players are divesting late-life assets or those with more carbon footprint as the investing fraternity adds more emphasis on going green.

Ping provided an annual pre-tax profit of between RM18 million and RM22 million from 2017 to 2019, representing 33%-38% of DNeX's total. It was also profitable at pre-tax level in 2020.

The acquisition will allow DNeX to consolidate the financial results from Ping moving forward — essentially tripling the current contribution levels. This will come in handy to boost DNeX's earnings.

DNeX also has its core operations in the IT space, which contributed between RM45 million and RM55 million in annual operating profit pre-Covid.

The government in March granted a three-year extension for it to be the sole party to continue operating the National Single Window for trade facilitation. This division has contributed annual revenue of about RM90 million each year.

DNeX's Indonesian consortium in May secured a three-year contract with an estimated value of RM186 million to provide installation and maintenance support services of submarine cable communications systems. The contract comes with a three-year extension option.

For the 12-month period ended Dec 31, 2020, Covid-19 dragged DNeX net profit down to RM1.1 million from RM30.04 million a year before, as revenue fell 17.5% to RM239.52 million, from RM290.49 million.

DNeX's share price has nearly quadrupled from the start of the year, trading up to 83 sen from 22.5 sen on Dec 31, 2021.

Given the share price rally and the acquisition spree, is it a good opportunity to cash in? Will it be worthwhile for minority shareholders to stay on despite another round of dilution for the company's earnings potential?