Frontken Corporation Berhad - 1Q below expectations, but long-term growth intact
Tue, 06-May-2025 07:38 am
by Jayden Tan • Apex Research

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FRONTKN (0128)

Target Price (RM)

4.42

Recommendation

Buy

Executive Summary

  • Frontken’s 1QFY25 CNP came in at RM31.1m, below expectations at 16%/18% of our/consensus full-year forecasts, dragged by a weak TWD forex rate and softer O&G contribution due to front-loaded jobs in 4QFY24.

  • YoY, CNP rose 3.4% as strong margins from Taiwan’s semiconductor business (driven by AI-related demand) offset weaker O&G and forex headwinds. QoQ, CNP dropped 18.5% due to festive season downtime in O&G and adverse forex effects.

  • Cut FY25F/FY26F CNP by -10%/-3%, trimming semiconductor segment contributions amid more cautious global and geopolitical backdrop.

  • Maintain BUY with a slightly higher TP of RM4.42 (from RM4.37) as we rolled over forward valuation to FY26F to better reflect the Group’s longer-term growth prospects by assigning unchanged 35x PER (5-year mean) and appraised of 3-star ESG rating. Long-term growth prospects remain supported by ramp-up in AI/HPC-related demand and fab expansions.

 

Results below expectations. 1QFY25 CNP came in at RM31.1m, falling below our expectations, accounting for only 16% of our in-house forecast and 18% of consensus full-year estimates. While Q1 is seasonally weaker, the results were still softer than anticipated, mainly due to a weaker-than-expected TWD forex rate and a softer O&G segment performance under quarter review, as certain works and maintenance activities were expedited and completed earlier in 4QFY24.

 

YoY. CNP rose 3.4% yoy to RM31.1m, despite facing unfavourable TWD translation and weaker O&G sales. Earnings growth was mainly supported by the continued strong contribution from Taiwan semiconductor business, which fetches better margins, driven by robust AI chip-related activities and the ramp up of Plant 2. However, quarterly revenue declined 5.7% yoy.

 

QoQ. CNP declined by 18.5%, mainly due to a weaker contribution from the O&G segment, where segment revenue dropped 47% qoq, impacted by shorter operational days during the CNY and Ramadan festive periods. Additionally, the strengthening of the MYR during the quarter led to an unfavourable forex translation, further weighing on earnings. Quarterly revenue fell by 11.3% qoq.

 

Developments. Frontken has acquired a new piece of land in Taiwan as part of its preparation to build a new facility aimed at catering to strong demand from HPC and AI-related work. Meanwhile, new business opportunities are emerging as its customers are establishing new fabs in India and Singapore, targeting monthly production of 50k 12-inch wafers. Additionally, Frontken is currently in discussions with a strategic partner in Arizona, US, exploring a collaborative arrangement instead of a greenfield setup to support its customer’s operations there.

 

Outlook. Despite a softer-than-expected 1Q, we remain confident that performance will recover in the coming quarters, supported by a rebound in the O&G segment. Additionally, the recent appreciation of TWD against MYR driven by expectations that Taiwan authorities may allow the currency to strengthen to facilitate a trade deal with the US is expected to benefit Frontken through positive forex translation effects. However, we are less optimistic over Frontken’s outlook for FY25 due to the lingering uncertainties surrounding Trump tariffs, which could impact customer demand and lead to pricing pressure amid a weaker global economic environment. Furthermore, Frontken’s key Taiwanese tier-1 fab customer has announced an additional USD100bn investment in the US, potentially diverting some volume to its US operations due to geopolitical pressure. Any delays or profit-sharing arrangements with partners in the US could also result in less favourable outcomes for Frontken. That said, we remain positive on the longer-term outlook, underpinned by the ongoing rollout of new fabs and the commercial ramp-up of 2nm nodes expected in FY26, in line with the sustained demand for AI and HPC-related technologies.

 

Earnings Revision. We have revised our FY25F/FY26F CNP forecasts lower by 10%/3%, respectively, after trimming our sales projections for the semiconductor segment. The adjustment reflects a more measured outlook to better align with the current macro and industry environment, acknowledging that our previous assumptions may have been slightly optimistic.

 

Valuation. Despite the downward revision in our earnings forecasts, we continue to favour Frontken as an alpha pick within the technology sector, given its relatively small exposure to current market uncertainties and potential to benefit from the return of foreign investors to the local market. We maintain our BUY recommendation with a slightly higher target price of RM4.42 (from RM4.37), as we roll over our valuation metrics to FY26F to better reflect the Group’s longer-term growth prospects. Our valuation is based on an unchanged PER of 35x, in line with its five-year mean forward PER, applied to FY26F EPS.

 

Risk. Forex fluctuations, particularly in Taiwan, could affect reported revenue. In addition, the lingering risk of Trump-era tariffs may undermine fab investment confidence

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