• Profile. Frontken is a leading provider of surface metamorphosis and mechanical engineering solutions, serving a diversified industries including semiconductor (foundries), TFT-LCD, hard disk, manufacturing, oil and gas (O&G), power generation, renewable energy, marine etc.
• To date, the Group’s customer portfolio comprises key players in the O&G, power generation, petrochemical and semiconductor industries in mainly Singapore (15% to FY16 revenue), Malaysia (27% to FY16 revenue) and other countries such as the Indonesia, Thailand, Taiwan (biggest revenue contributor 48% in FY16) etc. Over the years, Frontken has switched from its heavy focus from O&G related services to higher margin semiconductor services, which contributed over 70% revenue.
• Prospects. Growth and margin expansions will be mainly driven by increasing stake in its Taiwan subsidiary, which is undergoing capacity expansion as well as its Malaysia operations, Furthermore, with its main foundry customer from Taiwan, who will be fabricating the core processor based on 10nm technology for the much awaited blockbuster smartphone, demand for Frontken’s services are expected to be in great demand. Earnings are likely to soar further as Frontken is planning to expand its footprint into China (likely by 2019), a market which is expected to experience multiyear superior growth.

• Anticipate the greenback to regain momentum in 2H18 amid more aggressive Fed in tightening and QE unwinding. Overall, we believe the market has largely priced in the negative impact of the strengthening ringgit on Frontken earnings after plunging 22.9% from 52-week high of RM0.525 on 11 Jan to RM0.405 yesterday. We see the recent price pullback (mainly dampened by weakening US$) as a good buying opportunity as fundamentals are intact. Moreover, Frontken’s revenue denomination are according to currencies in its respective footprints such as Singapore, Taiwan, Indonesia and Thailand, which may cushion the risks of solely quoted in US$.

• Downside risk limited. At RM0.405, Frontken is trading at 12.3x FY18 P/E (against 5-year average of 27x). Excluding its net cash with RM72m or 6.8 sen per share, valuation is even more compelling at 8.5x P/E. The stock’s upward channel trend line since Aug 2017 remains intact. We think that the recent share price retracement may represent a good buying opportunity with share prices remain firmly above the 200d SMA near RM0.37, substantiated by grossly oversold technicals.
• If prices could cross above the 50% FR at RM0.435, its upward trajectory would probably resume and subsequently test higher target5s at RM0.47 (30d SMA) and our LT objective at RM0.50 psychological barrier. Key supports are RM0.37-0.395. Cut loss at RM0.365.

Source: Hong Leong Investment Bank Research - 13 Feb 2018