Frontken Corporation Berhad - Impacted by O&G business
Thu, 15-Aug-2024 06:56 am
by Jayden Tan • Apex Research

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FRONTKN (0128)

Target Price (RM)

4.33

Recommendation

Hold

Summary

Frontken’s 1HFY24 net profit at RM63.4m missed our expectations, primarily due to sluggish results in Oil & Gas (O&G) segment.

Looking ahead, we hold a positive earnings growth outlook, supported by expectations of volume and margin expansion with stronger orders from customers and Plant 2 production ramp up.

We downgraded our recommendation to HOLD with unchanged target price of RM4.33 by pegging PE multiple of 35.0x to FY25F EPS of 12.5 sen.

 

Results Review

  • Results review. 2QFY24 core net profit increased 4.4% yoy and 10.9% qoq to RM33.3m, driven by sustained higher sales from semiconductor customers in Taiwan. Revenue for the quarter grew 6% yoy. An interim dividend of 1.7 sen per share for the quarter was declared.

  • Results missed expectations. 1HFY24 core net profit accounts to 36% of our full-year forecast of RM177m and 38% of the street's estimate of RM167m. The weaker-than-expected performance is primarily due to sluggish contribution from the Oil & Gas (O&G) segment.

  • Operations Highlights. Taiwan semiconductor business remained solid, driven by increased AI demand. However, we observed a slight reduction in Taiwan’s operating margin, which fell -2% qoq, due to increased labor costs associated with a larger workforce. The O&G business was impacted by lower sales, slumping 33% qoq, due to delays in budget approvals from customers and the partial disruption at the Kulim plant. Restoration process at the Kulim plant is ongoing and is expected to return to full operational capacity by mid-September 2024.

  • Industry Highlights. Global semiconductor sales in 2Q24 increased 18.2% yoy and 6.5% qoq, primarily driven by strong demand for AI-related chips.

  • Outlook. Moving into 2H24, we expect better performance, driven by seasonality and ramp-up of productivity from Plant 2. Frontken is well-positioned to benefit from the anticipated global recovery in the E&E sector in 2025 and sustained demand for AI chips. Additionally, key Taiwanese clients are expected to begin ramping up production of advanced 2nm chips in 2Q2025, which bodes well for Frontken’s topline and margins following the more complexity in processes involved.

  • Valuation. Revised our FY24F earnings forecasts downward by -13% to account for a lower margin in O&G segment as well the Taiwan subsidiary. We introduced FY26F core net profit at RM206.2m, with low single-digit growth as capacity utilisation nears peak following the stronger growth expected to record in FY25F. Consequently, we have downgraded our rating to HOLD, with an unchanged target price of RM4.33 by pegging PE multiple of 35.0x to FY25F EPS of 12.5 sen. 

  • Risk. Slower than expected recovery in consumer electronic demand. External headwinds including geopolitical tensions and global monetary policy uncertainty.

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