Dnex to step up on capex
12 Mar 2022
RIDING on the demand boom for technology devices and crude oil, Dagang Nexchange Bhd (Dnex) seems to have found a sweet spot. The company is in semiconductor manufacturing and oil and gas (O&G) production. It also has an information technology (IT) business.
Dnex made two major acquisitions last year – a 60% stake in Silterra Malaysia Sdn Bhd and taking an additional 60% of Ping Petroleum Ltd.
The acquisitions led Dnex to become a major player in the semiconductor and O&G sectors simultaneously. It now has a wafer fabrication plant, and has become an upstream oil and gas producer in the UK’s North Sea region.
But, what lies ahead will be a challenging one for the company as the businesses require a high capital expenditure (capex).
According to CGS-CIMB Research, Dnex may need close to RM1bil in capex for the next three years. This is to increase its manufacturing capacity and achieve a higher production volume for Ping Petroleum.
Dnex group managing director Tan Sri Syed Zainal Abidin Syed Mohamed Tahir admits that both the businesses will require high capex spending and that the group is finalising its capex for the next three years.
“For Silterra, we plan to increase its capacity by 20% to have a capacity of 10 million per annum by 2024 from 8.5 million presently.
“We estimate to spend about RM350mil for the first phase of Silterra’s expansion, which will see an additional 10% capacity coming in by early of next year,” he says.
Syed Zainal points out that the expansion is needed as the Silterra plant is running at almost full capacity.
“For the second phase, we will see the market demand then. We are also looking at introducing new products with higher margins,” he adds.
Silterra had been loss-making since 2017. Last July, Dnex and Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Centre (CGP Fund) bought a 100% stake in Silterra from Khazanah Nasional Bhd.
In less than six months, Dnex and the CGP Fund managed to turnaround Silterra.
Syed Zainal attributes the success to better operational efficiency and higher product margins.
“I spent almost every week in Kulim where the Silterra plant is located. The next plan is to secure long-term clients to ensure sustainability of earnings,” he says.
“The technology sector is moving very fast and margins have improved compared to in 2017,” he adds.
Silterra contributed 60% to 70% of Dnex profits for FY2021, while the remaining came from O&G and IT.
Syed Zainal says Dnex will need at least RM200mil to RM300mil that could be raised through debt or internally generated funds or equity
“The rest of the capex requirement will be internally generated funds,” he says.
He does not rule out a potential spin-off of some of its businesses.
“All our businesses have high capex requirements. We are looking at all options to fund that. To be in manufacturing, O&G and IT will not be sustainable for the company. Spin offs are on the table but we need to create value first,” he says.
He estimates that the group’s O&G unit would need at least RM100mil in capex to develop its newly acquired Avalon oil field in the UK.
The Avalon oil field is 100% owned by Dnex and Syed Zainal says the group may be looking for partners to develop the field.
“Thanks to the current high crude oil price, we could use internally generated funds for the Avalon field. We expect that the field could have the capability to produce between 5,000 to 7,000 barrels a day, which will double or triple our current production,” he says.
In 2020, Dnex had planned to dispose of its 30% stake in Ping Petroleum. But, the group changed its plan and bought an additional 60% stake in Ping last year.
Ping owns a 50% joint upstream O&G operating company with Hibiscus Petroleum Bhd, which operates in the Anasuria cluster in the North Sea in the UK. It also has an E&P unit in Malaysia.
CGS-CIMB estimates that Dnex could see its earnings enjoy a compounded annual growth rate (CAGR) of 453% from 2021-2024 driven by higher selling prices of its wafer products and production volume from Silterra as well as Ping based on rising crude oil prices.
“Dnex enjoys a lower effective tax rate given that as of July 2021 Silterra had over RM12bil in unrecognised deferred tax assets.
”Note that we have yet to account for contributions from emerging technology platforms like silicon photonics that command premium average selling prices and commercialisation of Ping’s Avalon oilfield,”CGS-CIMB Research says in a recent report.
HLIB Research notes that Ping benefits from low operating expenses per barrel of US$20 (RM84) and a break-even figure of US$25 (RM105) per barrel.
“In the event of an oil price crash, we are comforted by the fact that these low opex levels provide shelter from going into deep operating losses.
“With that, we deem the Anasuria assets to be a valuable cash cow. Meanwhile, we estimate the unit’s breakeven price to be at about US$45 (RM189) per barrel on the net level,” the research house points out.
Oil prices surged to a 13 year high of US$130 (RM545) per barrel this month as supply concerns remained tight, especially with the Russian invasion of Ukraine. It has corrected to US$112 (RM470) per barrel.
Source: The Star