All-time high 4Q20 core net profit of RM24m (+11% QoQ, +25% YoY) matched expectations. This outperformance was mainly driven by Taiwan semi business coupled with relentless vigilance in cost discipline despite O&G industrywide slowdown. Frontken is planning to build new state-of-the-art facility to cater for 3/2nm demand. Reiterate BUY with higher TP of RM5.82, pegged to 50x of FY22 EPS. We like its unique exposure to leading-edge semiconductor frontend supply chain.

Newsbreak. (1) Bonus issue of 1 for every 2 shares held; (2) free warrant (5-year American style) of 1 for every 2 shares held. Both will be implemented concurrently. Expected to be completed in 2Q21 subject to regulatory and shareholders’ approvals.

Results in line. Record-breaking 4Q20 core net profit of RM24m (+11% QoQ, +25% YoY) brought FY20’s sum to RM83m (+18% YoY) which matched HLIB and consensus expectations at 100%, respectively. FY20 one-off adjustments include PPE disposal gain (RM1.6m), PPE written off (RM180k), allowance for impairment losses on receivables (RM202k), forex loss (RM937k) and withholding tax (RM1m) imposed on the dividend declared by AGTC.

Dividend. DPS of 2.8 sen (4Q19: 1.5 sen) with ex-date to be announced later. YTD DPS amounted to 4.0 sen (FY19: 2.5 sen).

QoQ. Turnover inched up 7% mainly due to better performances from all subsidiaries (Philippines: +7%, Taiwan: +2%, Malaysia: +41% and Singapore: +2%) except unit in Indonesia (-26%) due to O&G drag. Core net profit expanded by 11% to RM24m thanks to production process improvement leading to better cost management and lower effective tax rate.

YoY. Revenue saw a solid growth of 14% driven by Taiwan (+26%), Malaysia (+5%) and Philippines (+21%) which fully offset the contractions in Singapore (-15%) and Indonesia (-74%) attributable to the slowdown in O&G. In spite of that and higher MI charge, core earnings rose at a quicker pace of 25% thanks to margin improvement resulting from continual efforts to elevate efficiency across the Group.

YTD. Top and bottom lines gained 8% and 18%, respectively for the same reasons stated above.

Semiconductor. Generated 85% (FY19: 78%) of group revenue in FY20. Frontken is seeing advancement and deployment of new innovative technologies following global 5G rollout to benefit its business. It plans to expand Taiwan capacity by constructing a new state-of-the-art facility in anticipation of increase in demand for services related to tools involved in the most advanced node manufacturing.

O&G. Accounted for the remaining 15% of group turnover in FY20. It noticed that new orders are trickling from various umbrella contracts for provision of manpower supply and also mechanical rotating equipment services and parts.

Forecast. Updated model based on latest operating data points which lead to FY21- 22 earnings adjustments of -3% and +10%, respectively. Reiterate BUY with higher TP of RM5.82 (previously RM4.61), pegged to 50x (previously 45x) of FY22 EPS. We like Frontken for its multi-year growth ahead on the back of: (1) sustainable global semiconductor market outlook, (2) robust fab investment, (3) leading edge technology (7nm and below), and (4) strong balance sheet (net cash of RM304m or 29 sen per share) to supports its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 24 Feb 2021