Being in the OCD business has its advantage. To date, Frontken’s business is largely shielded from the deadly virus where two of its largest contributors (Taiwan and Singapore) are still in full operations and growing. Malaysia’s MCO is a slight hiccup and any shortfall is expected to be made up by Taiwan. 7nm/+ monthly output remains high and MTBC has stabilized in 1Q20. 5nm is on track for volume production this year, resulting to some backlogs. Secured 2 contracts under Petronas umbrella contract. Forecasts and TP of RM2.40 (pegged to 28x of FY21 EPS) were unchanged. Maintain HOLD.

AGTC, Taiwan (55% of FY19 sales). No lockdown there and semiconductor cleaning business are exceptionally busy as major customer is on track to achieve record performance. 2Q20 outlook still robust but 3Q20 is too early to gauge. Not particularly worried about the rumoured delay of new 5G smartphone launch by a US brand. If any, it is likely to be few-months deferment and do not expect the delay to dampen demand.

Singapore (21% of FY19 revenue). Circuit breaker commenced on 7 April but Frontken is allowed to operate (deemed as providing essential service), adhering to guideline with proper BCP. Cleaning demand from memory and China logic customers remains strong. Potential HDD business is currently in qualification stage.

Malaysia (19% of FY19 turnover). Most plants are operating but under controlled environment with 50% staff strength during the 1-month MCO. Semi orders were slow but began to pick up (+70-80%) recently. Not expecting any loss of business but just timing issue. While O&G repair and services business is moderate, it managed to ink two contracts under Petronas’ umbrella contract.

Semiconductor. The speculation of 3nm delay globally is viewed positively as new node introduction will usually create pressure to accelerate cost down. Currently, AGTC is supporting 3nm’s R&D. If delayed, AGTC will also delay the plan to build new state-of-the-art plant catered specifically for 3nm and 2nm. 7nm/+ monthly output remains high and mean time between cleans (MTBC) has stabilized in 1Q20. 5nm is on track for volume production this year, resulting in some backlogs. AGTC remains the sole certified cleaner for 5nm ALD machines. AGTC expansion within the current plant is under evaluation with a budget of less than RM5m.

O&G. In FY19, O&G reported PAT accounted for 9% of overall. Do not expect the impact of crude oil price plunge to be as severe as before (Brent fell from USD100/barrel to USD30/barrel in 2014-2016) as there was excessive spending then.

Other developments. MCO has curtailed travel thus M&A progress. Expect some challenges as the change in current market outlook may prolong the evaluation and negotiation processes. Continue to optimize its cost structure relentlessly and believe that there is still room to improve in semiconductor but limited in O&G. 1Q20 result announcement is tentatively planned for mid-May

Forecast. Unchanged as we opine that the strength from Taiwan is sufficient to offset Malaysia’s weakness. 1Q20 performance is expected to be stronger YoY. Although there is >10% upside, we maintain HOLD call in view of the volatile market climate. Our TP is unchanged at RM2.40, pegged to 28x 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 - 10 Apr 2020