Frontken 1H19 core net profit of RM33m (+64% YoY) beat expectations as 2H19 is usually stronger. Declared first interim dividend of 1 sen per share. Despite the weaker QoQ and YoY top line, bottom line appeared to be stronger on the back of enhanced efficiency. Semiconductor sector may experience a strong recovery in 2H19. Similarly for O&G as some 2Q19 billings are carried over into 3Q19. Our upward forecast revisions have led to higher TP of RM1.77, pegged to 25x of FY20 EPS. Maintain BUY.

Beat expectations. 2Q19 core net profit of RM17m (+12% QoQ, +35% YoY) brings 1H19’s total to RM33m (+64% YoY), accounting for 50% and 49% of HLIB and consensus full year forecasts, respectively. This is considered an outperformance as historically 1H only accounts for 37-40% of full year earnings. One-off adjustments include forex loss and withholding tax.

Dividend. Declared a first interim single tier dividend of 1 sen (2Q18: none) per share whereby entitlement and payment dates will be announced at a later date.

QoQ. Turnover moderated 4% attributable to lower contributions from Taiwan (-4%), Malaysia (-16%) and Philippines (-1%), offsetting the growth in Singapore (+4%). Nonetheless, core net profit gained 12% thanks to operational excellence, lower D&A and effective tax rate (2Q19 excluding withholding tax: 20% vs. 1Q19: 27%).

YoY. Top line’s 2% decline was attributable to the similar weaknesses mentioned above with moderations registered in Taiwan (-5%), Malaysia (-3%) and Philippines (- 8%) while partly mitigated by Singapore’s growth (+10%). With better economies of scale and continuous operational excellence, core net profit jumped 35% to RM17m.

YTD. Revenue increased 7% to RM164m stimulated by Singapore (+21%), Malaysia (+23%) and Philippines (+2%), more than sufficient to equalize Taiwan’s minor slip (- 1%). However, core earnings strengthened 64% on the back of leaner operations and lower effective tax rate (excluding withholding tax, 1H19: 24% vs. 1H18: 25%), despite higher D&A

Semiconductor. Generated 78% of group revenue in 2Q19. One of its customers seems to indicate that the worst may be over and 2H orders likely to ramp significantly. The customer further added that this is mainly driven by demand from high-performance computing (HPC) and communication (5G) segments.

O&G. Accounted for the remaining 22% of group turnover in 2Q19 with sustainable profitability. We understand that O&G contribution could have been higher if not due to timing issue and some billings were carried forward into 3Q19. It also noticed that number of enquiries had picked up with high conversion rate into sales. We believe the growth story remains intact and this performance is sustainable going forward considering Brent crude price remains stable at current levels.

Forecast. Tweaked both semiconductor and O&G EBITDA margin assumptions. In turn, FY19-21 EPS are revised upward by 5-6%.

Reiterate BUY with a higher fair value of RM1.77 from RM1.67, reflecting the earnings revision. Our TP is pegged to 25x of FY20 EPS. 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) favourable O&G market; and (5) strong balance sheet (net cash of RM151m or 14.3 sen per share).

Source: Hong Leong Investment Bank Research - 1 Aug 2019