Result

• Frontken Corporation Berhad (Frontken) posted RM128.2m (+23.9% yoy & +7.6% qoq) revenue and RM 32.2m PATAMI (+40.6% yoy & 21.4% qoq) in its 2Q22. The remarkable performance was mainly due to: i) strong orders from the customer’s advanced nodes chips in semiconductor business and; ii) improvement in Malaysia business attributable to new orders from O&G business.

• Result in line with expectations. We deem Frontken’s 2Q22 and 1H22 results is in line with our/street expectations as the Revenue accounts 48%/46% and PATAMI accounts for 47%/45% of our/consensus full year forecasts as last quarter reported a seasonally lower earnings than remaining quarter of the year. We shall expect a stronger performance in 2H22.

• O&G business improved. Local business has reported RM3.2m profit which surged 104.7% yoy and 81.5% qoq and it’s largely due to new order of manpower supply and mechanical rotating service from Petronas Group. Meanwhile, the Singapore subsidiary also benefitted from the O&G business and reported RM4m profit (+13.3% qoq & -2.1% yoy). The improvement in O&G business was attributable to the elevated crude oil price which was in tandem with recovering of economic activities.

• Semiconductor business remained robust. 2Q21 semiconductor business continued to show robust growth proven by a growth of 13% yoy in revenue and 25% yoy in PAT. Meanwhile, Taiwanese subsidiary - AGTC contributed RM37.1m in the quarter which increased 31.1% yoy and 5.3% qoq.

• Dividend declared. The Group declared its first interim dividend of 1.6 sen/share. We expect total dividend for FY22 will be 4.1 sen/share, which translates into a yield of 2%.

Comments/Outlook

• Plant 2 is completed. The Plant 2 phase 1 is ready and is currently under qualification phase. We are expecting this to be qualified in 3Q22 and starting the production in 4Q22 to relieve the high utilization in Plant 1 as well as improving the efficiency of Plant 1.

• Assessing to abandon TFT/LCD business. The management is monitoring the TFT/LCD business volume and assessing whether to discontinue the business and transfer the capacity and resources to higher margin and better development semiconductor business.

• Margin of Singapore segment should see a declining in current FY. Causing by the manpower shortage coupled with higher operating cost results of inflation, the Singapore segment in FY22 shall see a YoY declining. We expect to see a 5% decline of PBT margin in Singapore segment.

• Positive Outlook in Semiconductor industry…… World Semiconductor Trade Statistics (WSTS) has forecast global semiconductor market will grow 16.3% yoy in CY2022, coupled with the recent $280billion bill passed in US to boost chip making and technology. Hence, the outlook of the sector remains optimistic going forward.

• ……but slower growth. Slower growing pace of semiconductor industry as weakness in end market especially in consumer related products such as PC and smartphones but this will be cushioned by the semiconductor market with future trends like data center and automotive which require more semiconductors chip in transition to electric and autonomous vehicles. However, we have been guided by the management that they are not seeing any slowing down of demand and business volume till this moment.

Earnings Outlook/Revision

• We are keeping our FY22F net earnings forecasts for RM 130.3m and FY23F net earnings forecasts of RM 145.3m with 11.5% growth. Meanwhile, we expect a stronger performance in 2H22 as Frontken’s customer in semiconductor and O&G usually ramp up their production in 2H.

Valuation & Recommendation

• Maintained HOLD with an unchanged target price of RM2.66. Our target price is pegged at PE multiple of 32x FY22F EPS (8.2 sen) which is -0.8stdv of the 3-yr mean PER. Whilst we favor the stock for its growth prospects, we believe current price has discounted all the positives.

Source: JF Apex Securities Research - 29 Jul 2022