All-time high FY22 sales of RM517m (+15%) yielded a core net profit of RM127m (+20% YoY) which matched expectations. Taiwan Plant 2 was completed in end of FY22. It has already been qualified by customers and started to receive jobs in 1Q23. Frontken expects to establish a presence in the US in 1H23 through M&As or/and partnerships. It is cautiously optimistic that the O&G positive momentum will carry through to FY23 thanks to increased orders leveraging on Petronas contracts. Reiterate HOLD with unchanged TP of RM3.20, pegged to 30x of FY23 EPS.

Within expectations. 4Q22 core net profit of RM33m (-4% QoQ, +7% YoY) brought FY22’s to RM127m (+20% YoY) which was in line, accounting for 104% and 100% of HLIB and consensus full year forecasts, respectively. FY22 one-off adjustments include forex gain (-RM2.4m), PPE disposal gain (-RM34k), withholding tax imposed on dividend from AGTC (+RM1.9m), provision for surtax on undistributed earnings by AGTC (+RM3.4m), fair value gain on short term investments (-RM72k), allowance for impairment losses on receivables (+RM760k) and PPE written off (+RM45k).

Dividend. Announced a second single tier DPS of 2.6 sen (4Q21: 2.5 sen) subject to shareholder’s approval at the upcoming AGM. The entitlement and payment dates will be announced at a later date. FY22 DPS 4.2 sen vs FY21’s 4.0 sen.

QoQ. Turnover was rather flat as the better performances from Malaysia (+8%) and Singapore (+17%) was offset by the declines in Philippines (-5%), Indonesia (-32%) and Taiwan (-4%). In turn, core net profit lost 4% to RM33m due to lower EBITDA margin.

YoY. Revenue saw a solid growth of 11% driven by Malaysia (+53%), Taiwan (+2%), and Singapore (+23%) which fully neutralized the contractions in Philippines (-16%) and Indonesia (-21%). 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. Yet, earnings only increased by 1% impacted by Taiwan Plant 2 pre operating cost.

YTD. Top line expanded by 15% to RM517m driven by Malaysia (+39%), Taiwan (+12%) and Singapore (+11%), offsetting the declines in Philippines (-9%) and Indonesia (-7%). In turn, bottom line strengthened by 20% attributable to operation excellence and lower effective corporate tax rate.

Semiconductor. Generated 81% (FY21: 85%) of group revenue in FY22. Taiwan Plant 2 was completed in end of FY22. It has already been qualified by customers and started to receive jobs in 1Q23. Frontken expects to establish a presence in the US in 1H23 through M&As or/and partnerships.

O&G. Accounted for 19% of group turnover in FY22. It is cautiously optimistic that the positive momentum will carry through to FY23 thanks to increased orders leveraging on Petronas contracts.

Forecast. Unchanged.

Reiterate HOLD 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 RM343m or 21.7 sen per share) to support its Taiwan and Singapore semiconductor expansions.

Source: Hong Leong Investment Bank Research - 24 Feb 2023