Results

• Weaker YoY. Frontken posted RM121.2m (-5.5% yoy) of revenue and RM 31.9m of PATAMI (-0.9% yoy) in 2Q23. The weaker yoy performance of revenue is mainly attributable to the lower demand in Semiconductor business due to the industry slowdown compare to last year.

• Improved QoQ. However, Frontken’s 2Q23 results grew +6.3% qoq in revenue and +35.3% qoq in Patami. From its QoQ growth, we can see that the semiconductor industry is recovering as the improved performance of Frontken is mainly attributed to the improvement from the semiconductor business contributed by its Taiwan, Singapore and Malaysian subsidiaries.

• Steady Margins. In 2Q23, despite the lower yoy net earnings, the group posted a higher qoq and yoy net margin of 26% (+1.2ppts yoy and +5.7ppts qoq). We have been guided from the management this is the result of better margin product mix and better operation efficiency.

• Results in line with expectations. Frontken’s 1H23 results are considered meeting expectations after revenue accounted for 38%/40% and PATAMI accounted for 39%/38% of ours and consensus’ full year forecasts respectively due to the seasonally weaker performance in 1H and we are expecting 2H to post a better performance riding on the recovery of semiconductor industry.

• Stronger Malaysia operation performance benefited from the improvement in O&G industry. Profit from the Malaysian division grew +25.4% yoy and +21.4% qoq while the Oil and Gas (O&G) segment’s revenue grew by 17% yoy and PAT increased by 131% yoy. The improvement is due to new order of manpower supply and mechanical rotating service from Petronas Group in the local business in tandem with the firm crude oil price. Overall, O&G business accounted 22% of total revenue in 1H23 compared to 1H22: 18% contribution.

• Semiconductor business. In 2Q23, Frontken’s semiconductor business recorded a drop YoY but grew QoQ as the global semiconductor outlook started to recovering in near-term. Overall, Semiconductor business accounted 78% of total revenue in 1H23 which -10% yoy.

Comments

• Expecting a recovery in 2H. We opine that the destocking activities of customers are bottoming out based on our observation of industry trend and expect a gradual recovery in Frontken’s 2HFY23. Coupled with the ramping up of Plant 2 we should see a recovery of financial performance in 2H23.

• Plant 2 started to contribute to earnings in 1Q23. To recap, Plant 2 facilities have been starting to receive jobs in 1Q23 and the Plant will be mainly serving advance nodes (5nm, 3nm) with better ASP. We are guided that Plant 2 utilization in 2Q23 remained low as production will be ramp up with high utilization in 6-9 months and management are in the midst of discussing with customers on migrating part of some processes in Plant 1 to Plant 2. We are expecting Plant 2 to post higher contribution in 2H23. However, management has guided that the advance nodes will not contribute to higher margin in the beginning phase.

• Challenges. Despite destocking activities in the industry are showing signs of coming to an end, we remain cautious about the overall industry outlook due to the persisting high level of uncertainties caused by economic conditions worldwide. Furthermore, the Group is facing challenges related to manpower shortages, due to difficulties in hiring. This situation may result in a lower utilization rate than initially expected, impacting the Group's operational efficiency and performance moving forward.

Earnings Outlook

• We are keeping our FY23F net earnings forecasts of RM145.3m and FY24F of RM 187.4m.  

Valuation/Recommendation

• Maintained HOLD with an unchanged target price of RM 3.32.  

• 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 as we remaining cautious on the industry outlook despite the outlook has more encouraging compared to 1H coupled with the challenging in manpower, we believe current price has discounted all the positives.

Source: JF Apex Securities Research - 2 Aug 2023