1Q22 core net profit of RM29m (-7% QoQ, +30% YoY) matched expectations. While sequential weakness was due to seasonality, YoY performance was solid thanks to strong orders from both semiconductor in Taiwan and O&G in Malaysia. Frontken believes that the projected substantial increase in production by the semiconductor companies and persistent higher demand of chips will be a boon for its business in years to come. At the same time, it is cautiously optimistic on O&G to perform better than FY21. Reiterate BUY with unchanged TP of RM3.20, pegged to 30x of FY23 EPS. We like its unique exposure to leading-edge semiconductor frontend supply chain.

Within expectations. 1Q22 core net profit of RM29m (-7% QoQ, +30% YoY) was in line, accounting for 24% and 23% of HLIB and consensus full year forecasts, respectively. 1Q21 one-off adjustments include forex gain (-RM917k), PPE disposal gain (-RM17k) and provision for surtax on undistributed earnings by AGTC (+RM3.4m).

Dividend. None (1Q21: None).

QoQ. Turnover was down by 2% mainly due to seasonal weakness given shorter business period in 1Q as a result of long public holidays. In terms of segment, the better performances from Taiwan (+1%) and Indonesia (+25%) were neutralized by declines in Singapore (-6%), Malaysia (-8%) and Philippines (-20%). In turn, core net profit fell by 7% to RM29m while EBITDA margin was held steady at 38%.

YoY. Revenue saw a solid growth of 15% driven by Taiwan (+21%) and Malaysia (+10%) which fully offset the contractions in Singapore (-1%), Philippines (-11%) and Indonesia (-15%). 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. The softness in Singapore was caused by workforce shortage attributable to Covid-19 safety measures and delay in O&G orders attributable to Russia-Ukraine war disruption. In turn, core earnings rose at a quicker pace of 30%.

Semiconductor. Generated 86% (1Q21: 85%) of group revenue in 1Q22. According to WSTS, global semiconductor market is projected to grow by 8.8% in 2022 to USD601bn with expansions from all regions and product categories. As such, wafer foundries are likely to remain strong due to tight supply caused by capacity. Frontken believes that the projected substantial increase in production by the semiconductor companies and persistent higher demand of chips will be a boon for its business in years to come. AGTC’s Plant 2 phase 1 expansion is slightly ahead of schedule and to be completed by 1H21.

O&G. Accounted for the remaining 14% of group turnover in 1Q22. Frontken is cautiously optimistic to perform better than FY21 due to increased demand partially caused by disruption in the global O&G supply.

Forecast. Unchanged. Reiterate BUY with unchanged TP of RM3.20 based on PE multiple of 30x of FY23 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 RM332m or 21 sen per share) to support its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 11 May 2022