Record-breaking FY21 core net profit of RM106m (+28% YoY) matched our and street expectations. Top and bottom line growths were driven by semiconductor business though O&G business has seen robust improvement. It believes that the projected semiconductor upcycle due persistent higher demand of chips will be positive for its business in years to come. In the meantime, the progress of commissioning of new facility in Kaohsiung, Taiwan to meet key customer’s projected increase in demand is on schedule. Reiterate BUY with lower TP of RM4.36, pegged to 50x of FY23 EPS. We like its unique exposure to leading edge semiconductor frontend supply chain.

In line. All-time high 4Q21 core net profit of RM31m (+17% QoQ, +28% YoY) brought FY21’s total to RM106m (+28% YoY) which was in line with HLIB and consensus expectations, accounting for 105% and 100% of full year forecasts, respectively. FY21 one-off adjustments include forex gain (+RM298k), PPE disposal gain (+RM26k), PPE written off (-RM3k) and allowance for impairment losses on receivables (+RM141k).

Dividend. Announced second single tire DPS of 2.5 sen (4Q20: 2.8 sen) where entitlement and payment dates will be announced at a later date. FY21 DPS 4.0 sen vs FY20’s 2.7 sen.

QoQ. Turnover inched up 4% mainly due to better performances from all segments: Singapore (+6%), Malaysia (+7%), Taiwan (+3%), Philippines (+8%) and Indonesia (+42%) and Singapore (-6%). In turn, core net profit gained 12% to RM30m thanks to efficiency gain as EBITDA margin strengthened 1.4ppt.

YoY. Revenue saw a solid growth of 20% driven by Malaysia (+9%) and Taiwan (+29%), Singapore (+3%) and Indonesia (+58%), more than sufficient to offset the contraction in Philippines (-7%). Filtered down, core earnings rose 28% on the back of stronger EBITDA margin (+2.5ppt).

YTD. Top and bottom lines strengthened by 22% and 28%, respectively thanks to robust semiconductor business. In terms of segmental sales breakdown, Taiwan (+29%) led the pact, followed by Malaysia (+23%) and Singapore (+1%), while both Philippines (-2%) and Indonesia (-12%) experienced declines.

Semiconductor. Generated 85% (FY20: 85%) of group revenue in FY21 at RM381m and PAT improved 24% YoY. Frontken believes that the projected semiconductor upcycle due persistent higher demand of chips will be positive for its business in years to come. In the meantime, the progress of commissioning of new facility in Kaohsiung, Taiwan to meet key customer’s projected increase in demand is on schedule.

O&G. Accounted for the remaining 15% of group turnover in FY21 at RM69m and PAT improved 222% YoY. It also noticed new orders from the various contracts for provision of manpower supply and mechanical rotating equipment services and parts with Petronas have picked up and hope that this momentum will escalate further throughout 2022. The completion of new facility in Pengerang was timely to offer extra services to customers.

Forecast. After updating our model, FY22-23 core net profit is revised by -1%. Reiterate BUY with lower TP of RM4.36 (previously RM4.42), pegged to 50x of FY23 EPS, reflecting the earnings adjustment. 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 RM315m or 20 sen per share) to supports its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 28 Feb 2022