Frontken’s 1Q20 core net profit of RM16m (-14% QoQ, +6% YoY) matched expectations. Sequential weakness was mainly due to seasonality. On the YoY basis, bottom line growth outpaced top line expansion attributable to relentless focus on operational excellence. Amid Covid-19 outbreak and plunge in crude oil price, Frontken is cautiously optimistic on its business outlook. Forecasts and TP of RM2.40 (pegged to 28x of FY21 EPS) are unchanged. Maintain HOLD.

Within expectations. 1Q20 core net profit of RM16m (-14% QoQ, +6% YoY) yielded no surprise, accounting for 20% and 19% of HLIB and consensus full year estimates, respectively. 1Q is seasonally the weakest quarter and we expect Covid-19 to have limited impact on its operations. Forex gain of RM671k was adjusted to arrive at our core net profit.

Dividend. None (1Q19: None).

QoQ. Turnover fell 5% attributable to seasonal weakness due to lesser business days. In terms of sales breakdown, Taiwan (+1%) and Philippines (+3%) gained while Singapore (-12%), Malaysia (-17%) and Indonesia (-26%) shrunk. In turn, core net profit contracted by 14% due to higher effective corporate tax rate (1Q20: 26.3% vs. 4Q19: 20.0%). This includes the surtax provision on AGTC’s undistributed earnings.

YoY. Revenue saw a marginal growth of 1% driven by Taiwan’s semiconductor (+15%) and Indonesia’s O&G (+92%) businesses, but largely neutralized by the declines in Singapore (-4%), Malaysia (-28%) and Philippines (-9%). The contractions were mainly due to the slowdown in O&G segment. In addition, the MCO due to the Covid-19 pandemic has resulted in even lesser working days. However, bottom line expanded at a faster pace of 10% to RM16m thanks to better profit margin resulting from the continual efficiency improvement across the group.

Semiconductor. Generated 82% (FY19: 78%) of group revenue in 1Q20. Frontken anticipates the business condition will be challenging amidst global uncertainties and downside risks due to heightened global concerns over Covid-19 impact on the world economy. However, it is cautiously optimistic that performance for the remining months will be satisfactory provided the global economy is able to restart within the expected time frame.

O&G. Accounted for the remaining 18% of group turnover in 1Q20. The outbreak and the plunge in crude oil price has added a major layer of uncertainty to the market outlook and it will need to remain vigilant in FY20 while standing ready to embrace new opportunities for profitable growth in an evolving market landscape.

Forecast. Unchanged as results are in line. Maintain HOLD with unchanged TP of RM2.40, pegged to 28x of FY21 EPS. While 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), and (4) strong balance sheet (net cash of RM234m or 22.2 sen per share); these positives seems rather priced in at current valuations.

Source: Hong Leong Investment Bank Research - 13 May 2020