Results

• Frontken Corporation Berhad (Frontken) posted RM114m (-4.3% yoy & -15.7% qoq) of revenue and RM 23.6m of PATAMI (-11.1% yoy & -21% qoq) in its 1Q23. The weaker performance is mainly attributable to lower demand for semiconductors from Taiwan and Singapore.

• Higher core profit. The lower profit recorded was due to Plant 2’s operation cost started kick in in the quarter while production has yet to ramp up. Excluding the operational cost for Plant 2 (approximately RM 4m) and forex loss (RM 0.4m), the Group should achieve PATAMI of RM 29.5m in 1Q23 which grew +11.3% yoy and -1.1% qoq.

• Result in line with expectations. Frontken’s 1Q23 results are meeting ours and street expectations after revenue accounted for 19%/18% and PATAMI accounted for 16%/16% of ours and consensus’ full year forecasts due to the seasonally weaker performance in Q1.

• Stronger Malaysia operation performance benefited from the improvement in O&G industry. Profit from Malaysia rose +87.5% yoy and +198.5% qoq). The improvement was due to new order of manpower supply and mechanical rotating service from Petronas in the local business. Overall, the oil and gas (O&G) business accounted for 23% of total revenue in 1Q23 compared to 14% in 1Q22.

• Semiconductor business. In 1Q23, Frontken’s semiconductor business recorded drops YoY and QoQ as the global semiconductor outlook remained challenging in the near-term. Overall, the Semiconductor business accounted for 77% of total revenue (RM 88m) in 1Q23 which dropped -15% yoy and -18% qoq.

Comments

• Plant 2 started contributing to earnings in 1Q23. Plant 2 facility has started to receive jobs in 1Q23 and production will ramp up with higher utilization in 6-9 months. Plant 2 will be mainly serving advance nodes (5nm, 3nm) with better ASP. However, management has guided that the advance nodes will not contribute to higher margin in the beginning phase due to start-up costs.

• Customer’s earnings growth slowdown. A Taiwanese customer has released their 1Q23 results with slower QoQ growth and gave lower profit guidance in Q2 with a cautious outlook on the backdrop of normalized chip inventories among global players. This has implied weakness in global chip demand especially in consumer electronic. We expect it will impact Frontken as well with slower earnings growth.

Earnings Outlook

• We are keeping our FY23F net earnings forecasts of RM 145.3m and FY24F of RM 187.4m.

Valuation/Recommendation

• Maintained HOLD with a lower target price of RM 3.32 (RM 3.56 previously) as we assigned a lower PER.
   
• Our target price is now pegged at PE multiple of 28x FY24F EPS (11.9 sen) which is -0.5 stdv of the 5-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 - 5 May 2023