All-time high 3Q20 core net profit of RM22m (+7% QoQ, +21% YoY) matched our expectation. This outperformance was mainly driven by Taiwan semi business coupled with relentless vigilance in cost discipline despite O&G industrywide slowdown. New lines in Taiwan are expected to begin operation in Nov while it is planning to build new facility to cater for 3/2nm demand. Reiterate BUY with unchanged TP of RM4.10, pegged to 40x of mid-FY22 EPS. We like its unique exposure to leading-edge semiconductor frontend supply chain.

In line with HLIB but below street. Record-breaking 3Q20 core net profit of RM22m (+7% QoQ, +21% YoY) brought 9M20’s sum to RM59m (+15% YoY) which matched HLIB expectation at 71% but slightly missed consensus at 69%. 9M20 one-off adjustments include PPE disposal gain (RM1.5m), allowance for impairment losses on receivables (RM256k), forex loss (RM102k) and withholding tax (RM1m) imposed on the dividend declared by AGTC.

Dividend. None (3Q19: none). YTD DPS amounted to 1.2 sen (2Q19: 1.0 sen).

QoQ. Turnover inched up 8% mainly due to better performances from all subsidiaries (Philippines: +30%, Taiwan: +9%, Malaysia: +6% and Singapore: +2%) except unit in Indonesia (-47%) due to O&G drag. Core net profit expanded by 7% to RM22m as Indonesia unit swung back to losses. Semiconductor division unaudited profits were 20% better.

YoY. Revenue saw a solid growth of 9% driven by Taiwan (+32%) and Philippines (+6%) which fully offset the contractions in Singapore (-23%), Malaysia (-24%) and Indonesia (-20%) attributable to the slowdown in O&G. In spite of that and higher MI charge, core earnings rose at a quicker pace of 21% thanks to margin improvement resulting from continual efforts to elevate efficiency across the Group.

YTD. Top and bottom lines gained 7% and 15%, respectively for the same reasons stated above. We note that Taiwan revenue expanded by 27% with corresponding earnings growth of 49% on the back of margin improvement of 5ppt to 34%.

Semiconductor. Generated 86% (9M19: 78%) of group revenue in 9M20. Frontken is seeing advancement and deployment of new innovative technologies following global 5G rollout to benefit its business. It plans to expand Taiwan capacity by constructing a new state-of-the-art facility in anticipation of increase in demand for services related to tools involved in the most advanced node manufacturing. In the interim, AGTC has also added new production lines to better cope with the existing increasing demand. The lines are expected to be operational in Nov 2020.

O&G. Accounted for the remaining 14% of group turnover in 9M20. It noticed that new orders are trickling from various umbrella contracts for provision of manpower supply and also mechanical rotating equipment services and parts. While it hopes for more favourable 4Q20 and beyond, global oil demand and pandemic remain as key risks.

Forecast. Unchanged as results are in line.

Reiterate BUY with unchanged TP of RM4.10, pegged to 40x of mid-FY22 EPS. We justify this valuation based on its unique exposure to leading-edge semiconductor frontend supply chain which is currently in high demand on the back of national strategic and security interests. We 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 RM263m or 25 sen per share) to supports its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 4 Nov 2020