9M22 core net profit of RM94m (+26% YoY) matched expectations. Overall, the strong performance was attributable to operational excellence which yielded better EBITDA margins. It believes the persistent demand remains a growth catalyst and will lead to more chip research, design and manufacturing in the years ahead. New Plant 2 is qualified by customer and will be receiving parts for test run. It is cautiously optimistic that O&G will be strong for the remaining months in FY22. 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. All-time high 3Q22 core net profit of RM34m (+12% QoQ, +30% YoY) brought 9M22’s to RM94m (+26% YoY) which was in line, accounting for 77% and 74% of HLIB and consensus full year forecasts, respectively. 9M22 one-off adjustments include forex gain (-RM4.9m), PPE disposal gain (-RM32k), withholding tax imposed on dividend from AGTC (+RM1.9m) and provision for surtax on undistributed earnings by AGTC (+RM3.4m).

Dividend. None (3Q21: none). YTD DPS 1.6 sen vs 1H21’s 1.5 sen.

QoQ. Turnover was higher by 5% thanks to the better performances from Malaysia (+24%), Indonesia (+36%), Taiwan (+3%) and Philippines (+7%), more than sufficient to offset the decline in Singapore (-6%). In turn, core net profit gained by 12% to RM34m as EBITDA margin inched up by 1.4ppt.

YoY. Revenue saw a solid growth of 15% driven by Malaysia (+52%), Taiwan (+10%), Indonesia (+65%) and Singapore (+10%) which fully neutralized the contraction in Philippines (-5%). AGTC continued to benefit from the higher semiconductor demand. Improvement in Malaysia was attributed to pick-up in orders for maintenance and repair services of mechanical rotating equipment and manpower supply through Petronas contracts while Singapore engineering division saw an increase in O&G activities. As a result, earnings increased by 30% on the back of improved efficiency.

YTD. Top line expanded by 16% to RM382m driven by Malaysia (+34%), Taiwan (+16%) and Singapore (+7%), offsetting the declines in Philippines (-7%) and Indonesia (-2%). Bottom line strengthened by 26% attributable to operation excellence where EBITDA margin was lifted by 1.8ppt.

Semiconductor. Generated 80% (3Q21: 85%) of group revenue in 3Q22. Despite the inventory adjustment and slower macroeconomic growth, a Taiwanese client expects these negativities will be balanced by sustainable ramp-up of its industry-leading advance technologies. Frontken believes the persistent demand remains a growth catalyst and will lead to more chip research, design and manufacturing in the years ahead. New Plant 2 is qualified by customer and will be receiving parts for test run.

O&G. Accounted for 20% of group turnover in 3Q22. Frontken is cautiously optimistic that business will be strong for the remaining months in FY22 due to increased orders under Petronas contacts.

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 RM296m or 18.7 sen per share) to support its Taiwan and Singapore semiconductor expansions.

Source: Hong Leong Investment Bank Research - 2 Nov 2022