Bucking seasonality, 4Q18 performance was strongest ever and lifted FY18 core net profit to RM54m (+59% YoY) which topped expectations. Declared second single dividend of 0.8 sen per share. This outstanding performance was mainly driven by stronger semiconductor contribution while O&G exhibited resiliency with 3rd consecutive quarterly profit in 4Q18. Upward forecast revisions have led to higher TP of RM1.18 (20x of FY19 EPS). Maintain BUY.

Above expectations. FY18 revenue of RM327m translated into stronger-than expected core net profit of RM54m, accounting for 120% of HLIB and street full year forecasts, respectively. Again, 4Q18 performance was the 3rd back-to-back record breaking quarter in terms of both top and bottom lines.

Dividend. Declared a second single tier dividend of 0.8 sen per share (4Q17: none). The entitlement and distribution dates will be announced at a later date. YTD dividend amounted to 1.5 sen per share (FY17: 0.5), representing 30% payout yielding 1.7% at current price.

QoQ. Turnover increased 3% to reach RM89m thanks to higher contributions from Singapore, more than sufficient to offset the weakness elsewhere. After one-off adjustments, core net profit grew 31% to RM20m attributable to improved margins on the back of better economies of scale.

YoY. Top line gained 10% driven by Singapore and Malaysia’s contributions, which expanded 41% and 25% supported by both semiconductor and O&G businesses. Taiwan recorded marginally lower revenue of 1% due to weaker RM against TWD but at constant currency, it actually grew 2%. As a result, core earnings swelled by 83% on the back of operational excellence, lower D&A, net interest income and lower MI with increased stake in AGTC.

YTD. Revenue accelerated 10% supported by Taiwan (+9%), Malaysia (+15%) and Singapore (+17%) leveraging on stronger semiconductor demand. After excluding non-core items, bottom line spiked 59% to RM54m for the same reason mentioned above.

AGTC stake. Acquired additional 278k shares (or 0.82%) for RM1.2m in November 2018, increasing its interest to 89.59%.

O&G recovery. Recorded 3rd consecutive quarterly profit with RM2.0m in 4Q18 bringing YTD PAT to RM2.3m. We believe the turnaround story remains intact and this performance is sustainable going forward considering Brent crude price remains stable at current levels.

Prospects. Despite concerns surrounding trade tension and softer economic outlook, management believes its momentum will continue and is cautiously optimistic in FY19 while focus on the quality of services and cost management to stay competitive.

Forecast. FY19-20 EPS were revised upward by 13% and 9%, respectively based on latest data points. Reiterate BUY with a higher TP of RM1.18 (pegged to 20x of FY19 EPS), reflecting the earnings revision. We expect Frontken to experience multi-year growth ahead on the back of (1) sustainable global semiconductor market outlook; (2) robust fab investment; (3) leading edge technology (7nm and below); (4) O&G recovery; and (5) strong balance sheet (net cash of RM138m or 13 sen per share).

Source: Hong Leong Investment Bank Research - 13 Feb 2019