Frontken’s FY19 core net profit of RM70m (+28% YoY) matched expectations. Relentless focus on operational excellence has yielded strong bottom line growth outpacing top line expansion. Outlook for both business segments remain positive, yet to see any Covid-19 impact: gaining new customers in semiconductor while O&G to leverage on Petronas appointment. Forecasts were unchanged but we lifted our TP to RM2.40, pegged to 28x of FY21 EPS. Maintain HOLD.

Within expectations. 4Q19 core net profit of RM19m (+5% QoQ, -3% YoY) brings FY19’s total to RM70m (+28% YoY), which match expectations accounting for 97% of HLIB and consensus full year forecasts, respectively. 4Q19 one-off adjustment includes PPE disposal gain and forex loss (RM1m).

Dividend. The board declared a second single tier dividend of 1.5 sen (4Q18: 0.8 en) per share. FY19 total dividend amounted to 2.5 sen (FY18: 1.5 sen) per share (38% payout ratio), higher than our previous projection of 2.1 sen per share.

QoQ. Turnover gained 2% attributable to higher contributions from Taiwan (+6%), and Malaysia (+2%), offsetting the declines in Singapore (-7%), Philippines and Indonesia (-1%). In turn, core net profit grew 5% boosted by lower D&A (-17%) and effective corporate tax rate (4Q19: 20% vs 3Q19: 22%).

YoY. Top line was flattish driven my Taiwan’s semiconductor (+8%) and Malaysia’s O&G (+4%) businesses, but largely neutralized by Singapore and Philippines due to operational issues experienced by respective customers resulting in some works being requested to be put on hold. However, core earnings dipped 3% to RM19m due to lower EBITDA margin, higher effective corporate tax rate (4Q19: 20% vs 4Q18: 18%) and MI charge.

FY19. Revenue increased 4% to RM340m stimulated by Malaysia (+11%), Singapore (+7%) and Taiwan (+2%) offsetting the decline Philippines and Indonesia (-7%). However, core earnings strengthened 28% thanks to leaner operations where EBITDA margin gained 5ppt.

Semiconductor. Generated 78% (FY18: 80%) of group revenue in FY19. Frontken believes that the developments in the electronic and technology space will be positive for years to come. Despite the Covid-19 outbreak, it has yet to experience any impact and utilization was surprisingly high even during CNY. Getting orders from new clients in HDD (high volume with simple cleaning process) and solar players. It is in talks with an equipment maker who is setting up shop in Penang for new machine cleaning.

O&G. Accounted for the remaining 22% of group turnover in FY19 with sustainable profitability. The appointment as one of Petronas’ panel contractors for the provision of manpower supply and mechanical rotating equipment services and parts augur well for the group in the next few years.

FY20 capex. Likely to be at the same level as FY19 (RM7-8m).

Forecast. Unchanged as results are in line. Maintain HOLD while our TP is higher at RM2.40, pegged to 28x (previously 25x) of FY21 EPS. We still like Frontken for its 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 RM223m or 21.2 sen per share).

Source: Hong Leong Investment Bank Research - 19 Feb 2020