At RM0.41, Frontken is trading at 10.3x FY18 P/E (against 5-year average of 20x). Excluding its net cash with RM96m or 9.1 sen per share, valuation is even more compelling at 8x P/E. Downside risk is limited, as sentiment is boosted by recent USD strength (vs RM), potential triangle breakout and company‘s recently approved share buy-back exercises selldown.

Diversified customers. To date, the Group’s customer portfolio comprises key players in the O&G, power generation, petrochemical and semiconductor industries. In terms of FY17 revenue breakdown, Taiwan was the biggest contributor 58%, followed by Singapore (19%), Malaysia (17%) and other countries such as Indonesia and Thailand (6%). 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.

Still steady outlook. 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 7 & 10nm technology for the much awaited blockbuster smartphones, demand for Frontken’s services are expected to be favourable in the medium to long term despite challenging operating environment triggered by ongoing trade war negotiations between US-China. More earnings upside beyond FY19 as Frontken is planning to expand its footprint into China, a market that is expected to experience multiyear superior growth.

Undemanding valuation. At RM0.41, Frontken is trading at 10.3x FY18 P/E (against 5-year average of 20x). Excluding its net cash with RM96m or 9.1 sen per share, valuation is even more compelling at 8x P/E. Downside risk is limited, as sentiment is boosted by recent USD strength (vs RM), potential triangle breakout and company‘s recently approved share buy-back exercise.

Poised for a triangle breakout. We believe the recent weakness in share price represents a good buying opportunity with share prices remain firmly above the support trendline near RM0.38. If prices could cross above the 200d SMA at RM0.415 decisively, upward trajectory would probably resume and subsequently staging a downtrend line breakout near RM0.435 and to retest higher targets at RM0.455 (61.8% FR) and our LT objective at RM0.50 psychological barrier. Key supports are RM0.38-0.39. Cut loss at RM0.37.

Source: Hong Leong Investment Bank Research - 31 May 2018