1Q21 core net profit of RM22m (-8% QoQ, +36% YoY) matched expectations. Despite seasonal weakness, top line remarkably gained QoQ and would have lifted bottom line to new height if surtax was excluded. Newly acquired building will more than double AGTC’s current size to support strong semiconductor demand. In view of the strong oil price, Frontken is cautiously optimistic that its O&G division will perform better than FY20. Reiterate BUY with unchanged TP of RM3.88, pegged to 50x of FY22 EPS. We like its unique exposure to leading edge semiconductor frontend supply chain.

Within expectations. 1Q21 core net profit of RM22m (-8% QoQ, +36% YoY) was in line, accounting for 22% and 21% of HLIB and consensus full year forecasts, respectively. 1Q21 one-off adjustments include forex gain (-RM673k), PPE disposal gain (-RM21k) and allowance for impairment losses on receivables (+RM26k),

Dividend. None (1Q20: None).

QoQ. Despite the seasonal weakness, turnover inched up 3% mainly due to better performances from Taiwan (+8%) and Indonesia (+134%), more than sufficient to offset the declines in Singapore (-3%), Malaysia (-9%) and Philippines (-16%). While EBITDA margin gained 2.7ppt, core net profit fell by 8% to RM22m. This was solely due to the provision for surtax on undistributed earnings by AGTC. Core earnings would have been 9% higher if the surtax was excluded.

YoY. Revenue saw a solid growth of 22% driven by Taiwan (+34%) and Malaysia (+14%) which fully offset the contractions in Singapore (-7%), Philippines (-2%) and Indonesia (-20%). Volume in the semiconductor business picked up significantly due to higher demand and strong orders from one of its customers’ advanced nodes chips which benefited AGTC. At the same time, it also experienced higher orders from various contracts from provision of manpower supply and also mechanical rotating equipment services that Malaysia unit has with the Petronas Group of Companies. In turn, core earnings rose at a quicker pace of 36% thanks to margin improvement resulting from continual efforts to elevate efficiency across the Group.

Semiconductor. Generated 85% (1Q20: 83%) of group revenue in 1Q21. Frontken is seeing advancement and deployment of new innovative technologies following global 5G rollout and wide AI adoption to benefit its business. AGTC has signed the SPA to purchase an industrial building located in the Southern Taiwan Science Park at the price of RM53.3m. This will more than double AGTC’s physical operating and production space to support the growth and demand from customers.

O&G. Accounted for the remaining 15% of group turnover in 1Q21. It remains vigilant in 2021 in view of the strong Brent crude oil price recovery. Frontken is cautiously optimistic to perform better than FY20 and ready to embrace new opportunities for profitable growth in an evolving market landscape.

Forecast. Unchanged.

Reiterate BUY with unchanged TP of RM3.88, pegged to 50x of FY22 EPS. 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 RM323m or 20 sen per share) to supports its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 28 Apr 2021