Result

• Frontken Corp posted a record quarter result of 1QFY21 with its revenue of RM103.5m (+21.9% YoY and +2.4% QoQ) mainly attributable to the significant growth of the semiconductor business.

• Meanwhile, the Group recorded a lower QoQ PAT of RM24.9m (-1.4% QoQ but +36.1% YoY) mainly due to the provision for surtax on undistributed earnings by Taiwan subsidiary and we understand that if excluding the surtax, the PAT for 1QFY21 will be 9% higher QoQ.

• Further enhancement on profit margin. The Group recorded a better profit margin, 36% operating margin (+4ppts YoY and QoQ) and 34% PBT margin (+5ppts YoY and +3ppts QoQ) mainly due to higher revenue and sales volume.

• Result broadly within expectations. Overall, the Group’s performance is deemed to be in line with expectations with the PBT accounts for 22% of our/consensus forecasts. We shall see the Group to have stronger performance in the subsequent quarters as first quarter of the year usually lower than the remaining quarters of the year.

Comments/Outlook

• Expansion to cope with demand growth… The Group proposed an acquisition of property in Kaohsiung, Taiwan via its subsidiary on 6 April 2021. The acquisition will enable its subsidiary double the capacity to support the rising demand from its key customer as capacity from existing facility is insufficient to support the ever-increasing demand from customers.

• …in tandem with the significant growth of industry. The proposed acquisition will allow the Group to position itself to cater and service the next few generations of cutting-edge chips with anticipated strong demand as the global semiconductor industry is set to continue its robust growth well into the next decade in relation to emerging technologies such as autonomous driving, artificial intelligence (AI), 5G, etc.
• Optimistic outlook for O&G division. Frontken has experienced higher order from various contracts for provision of manpower supply and also mechanical rotating equipment services with Petronas in O&G division. We optimistic that the O&G division will perform better than FY20 on the back of economic recovery and the higher crude oil price than last FY.
• Interruption of operations in Singapore dragged the segmental performance. The Group posted geographical segmental profit under Singapore operation of RM4.2m in 1QFY21 (-22.2% YoY and -24.2% QoQ). The Singapore segment has been facing shortage of workforce because of the impact of CMCO from 5 March 2021 where the Malaysian employees were unable to commute to the Singapore office.
• Cash Rich. Frontken registered a net cash of RM310.5 million YTD, +6.5% growth from RM291.5 million in last quarter. The Group’s strong cash flow position forms a solid foundation to its future expansion.

Earnings Outlook/Revision

• We are keeping our earnings and revenue forecast for FY21 and FY22.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM3.86 (adjusted after bonus issue). Our target price is now pegged at PE multiple of 42x F22F which is in line with +1SD of 3-year mean PER. Our fair value of the stock renders 15% upside to the current share price.

Source: JF Apex Securities Research - 28 Apr 2021