Results

• Frontken Corporation Berhad (Frontken) posted RM135.3m (+11.3% yoy & +0.5% qoq) of revenue and RM 29.8m of PATAMI (+1% yoy & -14.1% qoq) in 4Q22. The better performance in revenue was mainly attributable to the Malaysian and Singaporean operations in tandem with the improvement in the O&G industry. However, lower QoQ profit was recorded due to Plant 2 operation cost kicking in the quarter but production has yet to start due to slight delay in qualification approval for the new facility.

• Core profit. Excluding the operational cost for Plant 2 (RM 4.2m), and forex loss (RM 2.5m), the Group achieved a normalized PATAMI of RM 37.9m in 4Q22 which grew +26.1% yoy and+5.8% qoq.

• Results in line with expectations. Frontken’s 4Q22 and full year 2022 results are meeting ours and street expectations as its revenue accounts for 100%/97% and PATAMI accounts for 97%/95% of ours and consensus’ full year forecasts. We deemed the results are in line with our forecast after excluding the exceptionals of forex loss and operational cost in Plant 2.

• Stronger Malaysia and Singapore operation performance benefited from the improvement in O&G industry. Revenue from Singapore rose +22.5% yoy and +17.3& qoq while Malaysia grew +53.2% yoy and +7.9% qoq. The improvement was due to various contracts of manpower supply and mechanical rotating service from Petronas Group and better sales from O&G customers in Singapore. Overall, the O&G segment accounted 19% of total revenue in FY22 with 45% yoy revenue growth and 85% yoy PAT growth.

• Semiconductor business flat. In 4Q22, Frontken’s semiconductor business recorded a flat performance while waiting for the commencement of Plant 2. The semiconductor business in Singapore is weakening mainly attributed to the slowdown in memory-related chips. Overall, the Semiconductor business accounted 81% of total revenue in FY22 with 9% yoy revenue growth and 17% yoy PAT growth.

• Dividend declared. The Board has declared its 2 nd dividend for FY22 of 2.6sen/share which takes full year dividend to 4.2sen/share (FY21: 4 sen/share) which is 1sen higher than our dividend forecast.

Comments

• Plant 2 started to contribute to earnings in 1Q23. Despite some delays, Plant 2 facilities has been qualified and started to receive jobs in 1Q23 and production is expected to ramp up with high utilization in 6-9 months. Plant 2 will be mainly serving advance nodes (5nm, 3nm) with better ASP.

• Customer’s earnings growth slowdown. A Taiwanese customer has released its 4Q22 results with slower QoQ growth and gave a cautious on outlook on the backdrop of chip inventories normalizing among global players. These signs are implying weakness in global chip demand especially consumer electronics. We expect this to impact Frontken as well with slower earnings growth.

• Optimistic as O&G business could benefit from stable oil prices. Following the firmer Brent crude price, O&G companies are expected to actively spend and increase their business activities, which lead to requiring more maintenance and repair services from Frontken. However, the management does not have any plans to expand the O&G operation despite opining that the O&G operation will record a stellar performance in FY23. Meanwhile, we have been briefed that the Group is considering shutting down its operation in Indonesia after bring loss making in the past few periods.

• Expanding foothold in the US through M&A. The management is actively penetrating into the US market through acquisitions to further expand their footprint in the industry as the management is positive on the mass development of the industry in the near term. We expect to see some progress sooner than later. Its sturdy balance sheet with RM 318m in total cash forms a solid foundation to the Group’s acquisition plans.

Earnings Outlook

• We are keeping our FY23F net earnings forecasts of RM 145.3m with 17.9% yoy growth. Meantime, we introduce our FY24F net earnings forecasts of RM 187.4m with 29% yoy growth support by the production ramp up in Plant 2.

Valuation/Recommendation

• Maintained HOLD with a higher target price of RM 3.56 (previously RM2.76) as we rollover our valuation to FY24. Our target price is now pegged at PE multiple of 30x FY24F EPS (11.9 sen) which is -0.5 stdv of the 3-yr mean PER after taking consideration of challenging economic outlook in the industry. Whilst we favor the stock for its growth prospects, we believe current price has discounted all the positives.

Source: JF Apex Securities Research - 24 Feb 2023