Highlights

• Background. Frontken is a leading engineering service provider for a wide range of industries, including the oil and gas, petrochemical, power generation, semiconductor and electronics manufacturing sectors in the Asia region.

• The company also owns a 57.9% stake in Ares Green Technology Corp (listed in Gretai Securities Market, Taiwan), whose customers include TSMC and AUO to name a few.

• Earnings to strengthen further in FY15. Management is optimistic that the strong financial performance in FY14 (net profit of RM18.8m vs. net loss of RM2.3m in FY13) will strengthen further into FY15, underpinned by several positive factors including: 1. The sustained bullish semiconductor sector outlook, which will have a positive spillover effect on Frontken; 2. Cont ribution from its subsidiary TTES Frontken Integrated Services, which Frontken acquired in May 2014; and 3. Improving performance from its operation in Indonesia after securing the licence from Special Task Force for Upstream Oil & Gas Business Activities in 2014 (SKK Migas).

• Frontken’s FY14 net cash has improved signi ficantly to RM28.8mm (or 2.9 sen/share) from RM4.7m (or 0.5 sen/share) a year ago.

Catalysts

• Margin expansion from strengthening of US$ and sustained run-up in the semiconductor sector; and

• Turnaround at the loss making operations, in particularly, its new facilities in Malaysia and Indonesia

Risks

• Slower-than-expected demand growth in the semiconductor sector;
• Fluctuating foreign currency movement (in particularly the US$); and
• Slower-than-expected turnaround.

Forecasts

• -

Valuation

• At current share price of 26.5 sen/share, Frontken is trading at FY14 P/E of 14.3. Netting off its net cash (2.9 sen/share), the stock is trading at FY14 P/E of 12.7x.

Source: Hong Leong Investment Bank Research - 28 Apr 2015