1H22 core net profit of RM60m (+24% YoY) matched expectations. Overall, the strong performance was attributable to operational excellence which yielded better EBITDA margins. 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. 2Q22 core net profit of RM31m (+5% QoQ, +19% YoY) brought 1H22’s to RM60m (+24% YoY) which was in line, accounting for 49% and 47% of HLIB and consensus full year forecasts, respectively. 1H22 one-off adjustments include forex gain (-RM2.6m), PPE disposal gain (-RM32k) and provision for surtax on undistributed earnings by AGTC (+RM3.4m).

Dividend. Announced first single tier DPS of 1.6 sen (2Q21: 1.5 sen) while entitlement and payment dates will be decided at a later date. YTD DPS 1.6 sen vs 1H21’s 1.5 sen.

QoQ. Turnover was higher by 8% thanks to the better performances from Malaysia (+24%), Singapore (+19%), Taiwan (+3%) and Philippines (+3%), more than sufficient to offset the decline in Indonesia (-32%). In turn, core net profit gained by 5% to RM31m as EBITDA margin inched up by 0.4ppt.

YoY. Revenue saw a solid growth of 18% driven by Malaysia (+38%), Taiwan (+17%) and Singapore (+11%) which fully neutralized the contractions in Philippines (-5%) and Indonesia (-26%). 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. For O&G, it experienced new orders for provision of manpower supply and mechanical rotating equipment services from Petronas contracts.

YTD. Top line expanded by 17% to RM247m driven by Malaysia (+24%), Taiwan (+19%) and Singapore (+5%), offsetting the declines in Philippines ( -8%) and Indonesia (-20%). Bottom line strengthened by 24% attributable to operation excellence where EBITDA margin was lifted by 1.1ppt.

Semiconductor. Generated 82% (2Q21: 85%) of group revenue in 2Q22. According to WSTS, global semiconductor market is projected to grow by 16.3% to USD646bn in 2022 with expansions from all regions and product categories. 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 is in the midst for being qualified by 3Q22 and it can support up to 1.4nm.

O&G. Accounted for the remaining 18% of group turnover in 2Q22 and contribute about 5% to bottom line. Frontken is cautiously optimistic to perform better than FY21 due to increased demand and expect 2H22 to be stronger.

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 RM315m or 20 sen per share) to support its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 29 Jul 2022