Result

• Frontken Corporation Berhad (Frontken) posted RM119.1m (+15.1% yoy) revenue and RM26.5m PATAMI (+15.8% yoy) in its 1Q22 result. The better YoY result was mainly due to contribution from semiconductor business thanks to the higher demand and stronger orders from the customer’s advanced nodes chips.

• Meanwhile, the Group recorded a lower QoQ performance in which revenue down -1.9% qoq and - 10.3% qoq for PATAMI. This was due to seasonal factor as Q1 had a short working period as a result of long public holiday.

• Result in line with expectations. We deem Frontken’s 1Q22 result is in line with our/street expectations as the PATAMI accounts for 20%/21% of our/consensus full year forecasts as first quarter performance usually weaker than remaining quarters of the year. We shall expect a stronger performance in subsequent quarters.

• Semiconductor business remained robust. 1Q21 semiconductor business continued to show robust growth as the revenue from semiconductor customers grew 16% yoy whilst PAT surged +18% yoy. Meanwhile, its Taiwanese subsidiary - AGTC contributed RM35.2m in the quarter which increased 28.1% yoy and 7.5% qoq. The positive momentum of the semiconductor business was mainly due to high demand of chip which benefited Frontken’s customers who are foundries of global wafer and chip and this is likely to remain in the near future.

• Singapore segment faced challenges. Singapore segment reported RM14.4m revenue (-0.6% yoy and 6.3% qoq) and RM3.5m PATAMI (-15.8% yoy and -36.7% qoq) in this quarter. The sluggish performance in Singapore segment was mainly dragged down by the shortage of workforce and delay of O&G customer orders attributable to the disruption of O&G supply chain in relation to Russia-Ukraine conflicts.

• Positive momentum in local business revenue. Malaysia segment reported RM16.3m revenue which was up +9.5% yoy largely attributed to new order of manpower supply and mechanical rotating service from Petronas Group. However, the earnings of the segment decreased -38.4% yoy due to deviation of cost and billing as cost was front loaded. However, we shall see profit to be gradually booked in in the later stage.

Comments/Outlook

• No significant contribution from Plant 2 in current FY. We do not expect any significant earnings contribution from Plant 2 in Taiwan as the Phase 1 will only commence its operation in end of the FY. Nonetheless, we expect positive earnings growth for the Group in FY23 and FY24 upon extension of Phase 2 and 3 in Plant 2.

• Plant 2 is more than just an increase of capacity. The expansion of Plant 2 in Taiwan is expected to increase 2.5x of current capacity. Meanwhile, the completion of Plant 2 is not purely increasing the capacity but improving the efficiency of Plant 1 as well. Hence, we do expect a better margin of the Group beyond the completion of Plant 2.

• Operating cost expected to increase. We foresee the operation cost to be increased in the near term after the commencement of Plant 2 in Taiwan and completion of Pengerang facility. Meanwhile, we were briefed by the management that the raw material cost are still stable and they do not foresee any high fluctuation in the near term.

• Outlook remains positive. We are still optimistic on the Group earnings performance moving forward in tandem with promising outlook of semiconductor as WSTS predicted 8.8% yoy growth of global semiconductor market in CY2022 due to tight supply and limited capacity coupled with the strong demand of advance nodes chips.

Earnings Outlook/Revision

• We keep our FY22F net earnings forecast of RM130.3m (24.7% yoy growth) and FY23F net earnings forecast of RM145.3m (11.5% yoy growth).

Valuation & Recommendation

• Maintain HOLD CALL with a lower target of RM2.66 (from RM3.46) after ascribing lower PER due to the valuation revision of technology stock on the back of rapid rising of interest rate which dents the valuations of growth stocks. Our revised target price is now pegged at PE multiple of 32x F22F EPS which is -0.8stdv of its 3-year mean PER. While we favour the stock for its growth prospects, we believe current price has discounted all the positives.

Source: JF Apex Securities Research - 11 May 2022