Frontken Corporation Berhad - Positioning stronger growth into FY25F
Thu, 07-Nov-2024 01:54 pm
by Jayden Tan • Apex Research

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FRONTKN (0128)

Target Price (RM)

4.33

Recommendation

Buy

Summary

  • Frontken’s 9MFY24 core net profit at RM98.7m came below our expectations, accounting to only 64% of our full-year forecast of RM153m and 66% of consensus expectations of RM151m.

  • We hold a positive outlook on earnings growth for Frontken, supported by anticipation of volume and margin expansion with strong orders from customers and the ramping up of production in Plant 2.

  • Upgraded to BUY recommendation with unchanged target price of RM4.33 by pegging PE multiple of 35x to FY25F EPS of 12.5 sen as recent share price weakness offers a decent entry level in anticipation of better FY25.

 

Results Review

  • Results review. 3QFY24 core net profit reached a record high, rising 32.1% yoy and 6% qoq to RM35.3m, primarily driven by sustained higher sales from semiconductor customers in Taiwan. Revenue for the quarter also hit a record, increasing 8.1% yoy and 7% qoq.

  • Below expectations. Frontken's 9MFY24 core net profit at RM98.7m accounts for 64% of our full-year forecast of RM153m and 66% of consensus estimate of RM151m. This weaker-than-expected performance is mainly attributed to a slower-than-anticipated recovery in the O&G segment and foreign exchange impact, which weighed onto PATAMI by c.RM3.3m.

  • Operations Highlights. Taiwan semiconductor business remained strong, with its largest customer experiencing increased production driven by rising AI demand and improvements in smartphone chip performance. However, operating margin in Taiwan declined slightly by c.1% qoq, primarily due to increased labour and electricity costs. The O&G segment showed qoq improvement but was lower yoy, impacted by disruption at the Kulim plant and delays in customer budget approvals. Notably, the Kulim plant resumed full operational capacity at the end of October.

  • Industry Highlights. Global semiconductor sales in August 2024 rose by 20.6% yoy and 3.5% mom, driven by sustained demand for AI-related chips alongside a recovery in memory and logic chip segments.

  • Outlook. Entering the final quarter of FY24, we anticipate growth to driven by the ongoing ramp-up of volumes from Plant 2. Looking ahead to FY25, stronger growth is expected from Taiwan as volume production for the latest node chips is set to begin in 2Q25. Additionally, capacity expansion by the largest customer in advanced packaging could translate into more advance tools projects. Margins may improve next year due to higher Plant 2 utilisation and planned customer price adjustments to offset elevated utility costs in FY25.

  • Valuation. We revised our FY24 earnings forecast downward by 9.3% to RM139.2m following weaker-than-expected results that came in below expectations. This adjustment reflects a moderated sales outlook for the O&G segment, slightly compressed margins for the Taiwan subsidiary due to higher electricity costs, and an increased forex impact. However, we are keeping our FY25 and FY26 forecasts unchanged. Given the recent share price decline amid broad market weakness, we are upgrading our recommendation to BUY from HOLD, with an unchanged target price of RM4.34. We believe current share price weakness may present an opportunity to accumulate Frontken’s shares in anticipation of improved market sentiment and stronger FY25 results.

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