Highlights
- Frontken is a leading provider of surface metamorphosis and mechanical engineering solutions, serving a wide range of heavy industries.
- Its treatment technology modifies material surfaces with unique properties to improve performance, increase efficiency, reduce maintenance cost and extend lifetime.
- Semiconductor: Largest contributor after expanding with 19.6% CAGR from FY12 to FY16. Serving both domestic and international renowned foundries and display players.
- Semiconductor division is expected to be the major growth driver for Frontken leveraging on the booming semiconductor industry. Based on WSTS’ latest May data, YTD17 global sales of semiconductor was even stronger than forecast.
- This bodes well for Frontken as AGTC had expanded 7 new production lines in FY16. AGTC will be focusing more on foundries with capabilities of 28nm and below which will yield healthier margins at the expense of volume.
- Engineering: Provides specialized services to stationary and rotating equipment and its components.
- O&G segment remains the major contributor but it has been dwindling since FY15 in tandem with the crash of crude oil price.
- However, overall industry is still weak but could have bottomed. Less concerning due to (1) less impact on maintenance-related services; and (2) Petronas cash flow improvement.
- RM/US$: Using RM/US$ as benchmark despite Frontken’s revenue denomination according to currencies in its respective footprints; the weak RM will be a catalyst for the company .
- Strong balance sheet: Ended FY16 in a net cash position of 6.3 sen per share and expect cash to continue piling up going forward in the absence of major CAPEX.
- Opportunistic M&A… which are complementary and meeting its stringent criteria. Recently, it has increased its stake in AGTC from 73.2% to 84.6% for a sum of RM14m.
Catalysts
- Robust growth of global semiconductor industry.
- Recovery of O&G market.
- Footprint expansion into China, a market which is expected to experience multiyear superior growth.
Risks
- FOREX, competition, regulatory and implementation risks.
Rating
NON-RATED- Positioned at the upper semiconductor supply chain where margins are generally more lucrative. A dividend policy could provide further upside. O&G outlook is uncertain amid the volatility in oil price.
Valuation
- Fair value of RM0.45 based on 15x of FY18 EPS.
Source: Hong Leong Investment Bank Research - 12 Jul 2017
http://klse.i3investor.com/blogs/hleresearch/127645.jsp
http://klse.i3investor.com/blogs/hleresearch/127645.jsp
