This article first appeared in The Edge Financial Daily on August 8, 2018
Frontken Corp Bhd
(Aug 7, 64 sen)
Initiate coverage with a target price of 84 sen: Frontken Corp Bhd’s share price has gained 82% since our non-rated report. Its financial outperformance was chiefly spurred by the semiconductor segment whereby the revenue contribution charted a four-year compound annual growth rate of 22% from financial year 2013 (FY13) to FY17. This is expected to expand from strength to strength going forward.
Semiconductor industry experts have consistently revised their projections of market growth upwards, now with an average estimate of 12.2%. We think that the consensus is way too conservative, considering that turnover for the first five months of FY18 recorded a 20.7% growth, coupled with a seasonally stronger second half to come.
The memory market is forecast to gain 27%, genuinely driven by volume instead of average selling prices as in 2017. This bodes well for Frontken, which has one of the world’s top three memory players as its major customer.
After recording all-time highs in 2017, semiconductor fabrication (fab) construction and equipment expenditures are expected to continue to scale new heights in 2018. As more equipment exists in the supply chain, there will be more demand for such cleaning services from Frontken to ensure uninterrupted production in a cost-effective manner.
Frontken has always been at the forefront in terms of technology and quality of service. The major investment in FY16 and FY17 has equipped Frontken with the capability to serve fab with tech nodes of 10nm and below. 7nm/+ will be the major nodes like 16nm and 28nm. Taiwan Semiconductor Manufacturing Company Ltd is projecting a 7nm wafer revenue contribution to jump and the ramp-up will be stronger than of any node they have had historically.
Our in-house oil price target is an average of US$71 (RM289.68) per barrel in 2018, up 29% year-on-year, and we believe that this price level will entice oil majors to gradually unwind their spending on the back of a stronger operating cash flow. This is evident by the higher capital expenditure spending guidance by oil companies. Based on our channel checks, tenders and enquiries are picking up, suggesting that the worst could be over.
Despite the huge price discounts during the change of major shareholdings (transacted at 39 sen per share), we perceive the deal positively due to the removal of any potential conflict of interest and risk, and the buy-in from a reputable and savvy private equity fund solidifies our belief in Frontken’s future prospects.
FY18 is projected to be a record-breaking year with both top and bottom lines achieving all-time highs. Frontken had a strong balance sheet as of the first quarter of FY18, with a net cash position of RM80.3 million or 7.6 sen per share. We believe that Frontken is capable of adopting a dividend policy to reward shareholders.
We initiate coverage with a “buy” rating and a fair value of 84 sen, pegged at 18 times FY19 earnings per share. This valuation is in line with the average of global suppliers in the fab industry. — Hong Leong Investment Bank Research, Aug 7