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

Counter

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.

Read more details in:

Disclaimer

The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report.

Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against Apex Securities Berhad. Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of Apex Securities Berhad.

Market Mover
Settlement Rates
Currency Buy Rates (RM) Sell Rates (RM)
USD 4.449296 4.484012
EUR 4.692599 4.701308
CNY 0.615732 0.616932
HKD 0.571606 0.576092
SGD 3.310067 3.336427