2Q18 is Frontken’s record quarter, propelling 1H18 core net profit to RM20m (+46% YoY) which meets expectations. This was mainly driven by stronger semiconductor contribution from Taiwan, Singapore and Malaysia. Excluding withholding tax, effective tax run rate was at 19%. Forecasts were unchanged. Reiterate BUY with unchanged TP of RM0.84.

Within expectations. 2Q18 results were its best quarterly performance in terms of both top and bottom lines. 1H18 revenue of RM153m was translated into a core net profit of RM20m, accounting for 50% and 51% of HLIB and consensus full year forecasts, respectively.

Dividend. None (2Q17: None).

QoQ. Turnover increased 15% to reach all-time high at RM82m thanks to higher contributions from Taiwan, Malaysia and Singapore’s and we believe this is driven by the semiconductor business segment. After one-off adjustments, core net profit surged 82% to RM13m attributable to better economies-of-scale as EBITDA margin gained 7-ppt.

YoY. Top line expanded 16% attributable to the growth from semiconductor business, where Taiwan and Singapore improved 12% and 24%, respectively. Malaysia and Philippines also recorded a better performance due to new works secured and expanded business portfolio. As a result, core earnings ballooned 88% on the back of higher productivity and lower MI with increased stake in AGTC.

YTD. Revenue accelerated 11% supported by Taiwan (+17%), Singapore (+7%) and Malaysia (+4%) leveraging on stronger semiconductor demand. After FOREX and withholding tax adjustments, bottom line gained 46% to RM20m for the same reason mentioned above.

Withholding tax amounted to RM2.4m was incurred in 2Q18 due to the dividend declared by AGTC. This one-off item has artificially inflated 2Q18 tax to RM6.2m or 32% tax rate. After adjustment, effective tax implies a usual run rate of 19%.

Management’s prospects. While global semiconductor market leading indicators continue to be encouraging, Frontken stated the ongoing trade war as a risk. It is cautiously optimistic for 2H18 while continue to be vigilant in cost management and improve efficiency. Its priority is to focus on quality to maintain competitiveness.

Forecast: Maintain as results were in line. Reiterate BUY with unchanged fair value of RM0.84, pegged to 18.0x of FY19 EPS. This valuation is in line with the average of global suppliers to the fab industry. Frontken is expected to experience multi-year growth ahead on the back of (1) Bullish global semiconductor market outlook; (2) Robust fab investment; (3) Leading edge technology; and (4) O&G recovery. We welcome the recent major change in shareholding despite the heavy discount. Frontken has a strong balance sheet and we foresee that it may adopt dividend policy.

Source: Hong Leong Investment Bank Research - 8 Aug 2018