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HLIB: ‘Worst-case scenario’ for DNeX priced in after Thursday’s heavy sell-off

KUALA LUMPUR (Nov 18): Hong Leong Investment Bank (HLIB) Research is of the view that the market has pretty much priced in the “worst-case scenario” for Dagang NeXchange Bhd (DNeX) — which is a highly unlikely outcome of its 60%-owned SilTerra Malaysia Sdn Bhd breaching the 55% Malaysian entity regulation set by the Ministry of International Trade and Industry (MITI). 

Nonetheless, HLIB is taking the opportunity to reduce SilTerra’s price-earnings multiple to 20 times from 30 times. However, it is still at a premium to Taiwan Semiconductor Manufacturing Co’s (TSMC) five-year mean forward multiple of 17 times, reflecting the scarcity premium of a listed wafer fab foundry on the local stock exchange.

With that, HLIB’s target price (TP) for DNeX was lowered to RM1.32 from RM1.74 previously, while maintaining a “buy” call. Note that if were to strip out SilTerra’s entire valuation out of DNeX, its TP would fall to a mere 47 sen.

On Thursday (Nov 17), DNeX shares were bashed down by as much as 30 sen or nearly 40%, before settling at 50.5 sen, down 25 sen or 33.11%, slashing its market value to RM1.59 billion.

HLIB said the breach of the 55% regulation is highly unlikely because there is no subscription exercise that would lead to Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Center (CGP) being a 33.3% shareholder of DNeX Semiconductor — a wholly owned subsidiary of DNeX — hence no possible breach in SilTerra’s shareholding structure.

“This, in turn, means that the outcome in which SilTerra loses its operating licence seems far-fetched.”

DNeX held an analysts’ briefing on Thursday following the commencement of its arbitration proceedings against CGP, a 40% equity partner of SilTerra. The remaining 60% is owned by DNeX.

“Throughout the briefing, we were guided that SilTerra’s operations and long-term agreements are not affected in any way. The unit is doing business as usual with its operating licence still intact. We were also told that DNeX’s relationship with CGP is still in good shape.

“The group views that the purpose of the arbitration is the best way to settle this impasse between DNeX and CGP. By seeking to have the agreement declared null and void, the matters would be resolved, and this will protect the interest of DNeX shareholders and SilTerra, and avoid any breach in the condition of the licence,” said HLIB.

In March 2021, Khazanah Nasional Bhd sold then loss-making SilTerra to DNeX and the China-based equity fund for RM273 million cash.

DNeX and CGP have committed to a capital injection of at least RM200 million by way of subscribing to new shares to be issued by SilTerra. Based on DNeX’s 60% stake, the capital injection by DNeX will amount to about RM120 million.

Both parties sought to opt for the issuance of irredeemable convertible preference shares (ICPS) in DNeX Semiconductor, amounting to RM100 million, to be issued to and subscribed by MIMAS. This would result in MIMAS holding a 33% stake in DNeX Semiconductor.

The point of contention is whether prior approval is needed from MITI for the proposed investment.

MIMAS is of the view that such approval is not required, and maintains that the shareholders’ agreement and subscription agreement, both dated Jan 21, 2022, are valid and enforceable.

However, DNeX disagrees.

“Vide MITI’s letter dated Feb 28, 2022, DNeX and CGP learned that prior approval from MITI is required in relation to the proposed investment,” said DNeX in the filing.

“DNeX and DNeX Semiconductor consider such approval as necessary, more so in light of the terms and conditions of the shareholders’ agreement and subscription agreement, which provide for MIMAS becoming a shareholder upon issuance of the ICPS and not their conversion. If so, this puts the [manufacturing] licence, and thus operations of SilTerra, at risk.”

Original News Link : https://www.theedgemarkets.com/article/hlib-worstcase-scenario-dnex-priced-after-thursdays-heavy-selloff

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