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Frontken is expected to experience multi-year growth ahead on the back of (1) Bullish global semiconductor market outlook; (2) Robust fab investment; (3) Leading edge technology; and (4) O&G recovery. We welcome the recent major change in shareholding despite the heavy discount. Frontken ha s a strong balance sheet and we foresee that it may adopt dividend policy. Initiate with a BUY with TP of RM0.84, pegged to 18x of FY19 EPS.

Share price peaked. It has gained 82% since our non-rated report. Financial outperformance was chiefly spurred by semiconductor segment whereby revenue contribution charted a 4-year CAGR of 22% from FY13 to FY17. This is expected to expand from strength to strength going forward.

Bullish market outlook. Semiconductor industry experts consistently revised their projection upwards, now with an average estimate of 12.2%. We think that consensus is way too conservative considering that 5M18 turnover has already recorded a 20.7% growth coupled with a seasonally stronger 2H18. Memory market is forecasted to gain 27% genuinely driven by volume instead of ASP as in 2017. This bodes well for Frontken who has 1 out of world’s top 3 memory players as its major customer.

Robust investment. After recording all-time highs in 2017, 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.

Technological leadership. Frontken has always been at the forefront in terms of technology and quality of service. The major FY16-17 investment has equipped Frontken with the capabiity to serve fabs with tech nodes of 10nm and below. 7nm/+ will be the major nodes like 16nm and 28nm. TSMC is projecting 7nm wafer revenue contribution to jump and the ramp will be stronger than any node they had in history.

O&G recovery. Our in-house oil price target is an average of USD71/bbl in 2018, up 29% YoY and we believe that this price level will entice oil majors to gradually unwind their spending on the back of stronger operating cash flows. This is evident by the higher capex spending guidance by oil companies. Based on our channel checks, tenders and enquiries are picking up, suggesting that the worst could be over.

Change in major shareholdings. Despite the huge price discounts (transacted at RM0.39/share), we perceive the deal positively due to (1) the removal of any potential conflict of interest and risk; and (2) the buy-in from a reputable and savvy private equity fund solidifies our belief about Frontken’s future prospects.

Financials. FY18 is projected to be a record breaking year with both top and bottom lines achieving all-time high. Strong balance sheet as 1Q18 net cash position stood at RM80.3m or 7.6 sen per share. We believe that Frontken is capable to adopt dividend policy to reward shareholders.

Initiate coverage with a BUY rating with a fair value of RM0.84, pegged to 18.0x of FY19 EPS. This valuation is in line with the average of global suppliers to the fab industry.

Source: Hong Leong Investment Bank Research - 7 Aug 2018
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