CGS-CIMB Research has initiated coverage on high-flyer Dagang NeXchange Bhd with an “add” rating and a sum-of-part (SOP)-based target price of RM1.60.
According to the research house, DNeX is well-positioned to benefit from SilTerra Malaysia Sdn Bhd’s turnaround, underpinned by on-going semi chips shortages and structural shift towards More-than-Moore (MtM) devices.
“SEMI (industry association comprising companies involved in the electronics design and manufacturing supply chain) projects global MtM wafers demand growing at a 10% CAGR (compound annual growth rate) in 2017-23F driven by megatrends such as wireless 5G infrastructure, electric vehicles, AI (artificial intelligence) and machine learning,” analyst Mohd Shanaz Noor Azam pointed out in an initiating coverage note.
“We project SilTerra to invest over RM900 mil capex in FY2022-2024F. The group plans to increase its mask layer (ML) capacity by 20% to 10 million ML/annum by CY2023F. We expect SilTerra to secure two new LTAs (long-term agreements) in 1H CY2022F that will take up 80% of its capacity.”
Moving forward, CGS-CIMB Research expects DNeX to post a three-year core earnings per share (EPS) CAGR of 453% (FY2021-2024F).
This is driven by (i) higher average selling price (ASP) of wafers; (ii) higher production volume of wafers on the back of new capacity expansion; (iii) higher average crude oil prices for Ping Petroleum Ltd; and (iv) higher production volume at Ping on the back of its new capex programme.
“DNeX also enjoys a lower effective tax rate given that SilTerra has over RM12 bil as of July 2021 in unrecognised deferred tax assets that could be offset against its future profits,” the research house pointed out.
“Note that we have yet to account for (i) contributions from emerging technology platforms like silicon photonics that command premium ASP; and (ii) commercialisation of Ping’s Avalon oilfield.”
The potential re-rating catalysts for DNeX are (i) a stronger earnings delivery in coming quarters; (ii) rise in institutional funds’ holdings (10% at end-December 2021); (iii) narrowing discount relative to Malaysian ATE (automated testing equipment) and OSAT (outsource semiconductor assembly and test) sectors; and (iv) higher crude oil prices.
Meanwhile, the downside risks include (i) weakening sentiment in global tech sector; (ii) delay in new capacity expansion at SilTerra; and capex programme at Ping; and (iii) lower crude oil prices.
At the close of today’s mid-day trading, DNex – the day’s most active stock thus far – was up 12 sen or 10.62% to RM1.25 with 163.4 million shares traded, thus valuing the company at RM3.94 bil. – Feb 16, 2022
Main photo credit: The Edge Markets
