Results

• Frontken Corporation Berhad (Frontken) posted RM134.6m (+15.4% yoy & +5% qoq) of revenue and RM 34.7m of PATAMI (+27.2% yoy & 7.9% qoq) in its 3Q22. The remarkable performance was mainly due to: i) its Taiwan semiconductor business remained robust; ii) improvement in engineering activities attributable to increased activities in the O&G industry.

• Result in line with expectations. Frontken’s 3Q22 and 9M22 results are in line with ours and street expectations as Revenue accounts for 74%/71% and PATAMI accounts for 72%/74% of ours and consensus’ full year forecasts despite a RM 1.9m one-off withholding tax expense in the quarter.

• Semiconductor business remained robust. In 3Q22, Frontken’s semiconductor business remained robust following growths of 17% yoy and 3% qoq in revenue. Meanwhile, its Taiwanese subsidiary AGTC contributed RM38.2m profit in the quarter which increased 25% yoy and 2.8% qoq.

• O&G business further improved. Frontken’s local business reported RM6m of profit which surged 147.6% yoy and 83.8% qoq largely due to various contract of manpower supply and mechanical rotating service from Petronas Group. The improvement in its O&G business was attributable to the stability of crude oil price which was in tandem with recovering economic activities.

Comments

• For the time being, management does not feel the pressure of demand slowing down. Following the management’s results briefing, we understand that the management does not feel that demand is slowing down as the customer orders for advance nodes is still robust.

• Slowing growth is expected. We are cautiously optimistic about the growth of the Group in FY23, supported by the maiden contribution of Plant 2. However, we are more cautious on the Group’s FY23 prospects than the management as we expect a downturn in the industry following weakness in the market amid a challenging economic environment.

• Capex Cut by major customer. The world’s largest chip manufacturers have announced CAPEX cut by 10% in FY22, implying weakness in chip demand especially in consumer electronic. This has created a chain reaction to the downstream players. Although the CAPEX reduction does not directly impact Frontken, but we expect it will cause a slower growth rate for the  Group. 

• Optimistic as O&G business could benefit from stable oil prices. Following the stable Brent crude price, which is hovering above USD90/barrel, O&G companies are expected to actively spend and increase business activities, which leads to requiring more maintenance and repair services from Frontken.

• Should see contribution from Plant 2 in 1QFY23. Plant 2’s phase 1 is ready and currently in the process of testing production facilities. We expect to see the production come on stream by end of FY22 or 1Q23 and this will be relieving the high utilization in Plant 1 as well as improving the efficiency of Plant 1.

• Singapore segment still struggling. The Group’s Singapore operation is still struggling in revenue and margin due to manpower shortage coupled with higher operating cost. Nonetheless, we are cautiously optimistic on the performance of its Singapore operation in FY23, supported by gradual normalization of labour market and few chip manufacturers is coming on stream in the country.

• Expanding foothold in semiconductor industry through M&A. From the briefing, we understand that the management is actively looking for acquisitions including a company in the US to further expand their footprint in the industry. However, these acquisitions are still in premature phases, so we will not adjust our earnings forecast in the near term. The sturdy balance sheet with RM 296m in total cash forms a solid foundation to the Group’s acquisition plans.

Earnings Outlook

• We are keeping our FY22F net earnings forecasts for RM 130.3m and FY23F net earnings forecasts of RM 145.3m with 11.5% growth.

Valuation/Recommendation

• Maintained HOLD with higher target price of RM 2.76 (previously RM2.66) as we rollover our valuation to FY23. Our target price is now pegged at PE multiple of 30x FY23F EPS (9.2 sen) which is -0.5 stdv of the 3-yr mean PER after taking consideration of challenging economic outlook in the industry. Whilst we favor the stock for its growth prospects, we believe current price has discounted all the positives.

Source: JF Apex Securities Research - 2 Nov 2022