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Stock Watch: FRONTKN (0128) FRONTKEN CORP BHD’s bonus issue in focus

MANY are wondering if the local tech stock rally still has legs after the recent correction from new highs. In any event, corporate exercises are aplenty with a slew of companies proposing bonus issues to increase the liquidity of their shares, and perhaps also to prop up prices as Malaysian investors favour bonus issues.

Consider the past few months, during which tech firms such as JF Technology Bhd, UWC Bhd, Greatech Technology Bhd and, more recently, Frontken Corp Bhd managed to generate additional interest in their shares after announcing a bonus issue.

JF Technology registered a sharp spike of 77.3% in its share price in the run-up to the ex-date of its bonus issue. UWC also gained an impressive 70.8% before the listing of its bonus shares, although Greatech’s share price gain was a more moderate 17.1%.

Given the performance of its peers, will Frontken enjoy a similar boost? After announcing a one-for-two bonus issue of shares (together with one bonus warrant for every two shares held) coupled with record-breaking results, the company’s share price rose to an intraday high of RM5.95 two days later on Feb 25, before retreating to a low of RM4.40 on March 9.

At last Thursday’s close of RM4.89, the stock had surged 264.9% over the past year, with trailing 12-month and forward 12-month price-earnings ratios of 62.5 times and 47.9 times respectively. The company’s market capitalisation now stands at RM5.15 billion.

The listing date of Frontken’s bonus shares has yet to be announced, but it has already received the green light from Bursa Malaysia. Based on an indicative exercise price of RM4 per warrant, the bonus issue of warrants is expected to raise up to RM2.11 billion in the future.

A technology analyst says a bonus issue merely shows the management’s confidence in the future of the company. “But right now, the sentiment is not that favourable because technology stocks have taken a breather, which will last for a while and we may not see the same kind of momentum for technology stocks that was seen two to three months ago,” he tells The Edge.

“Fundamentally, I am still positive on the tech sector. It is a healthy correction and the current consolidation may continue until the upcoming results. I am still very positive on the sector given that the chip shortage is still quite severe and demand is still there.”

Frontken provides surface metamorphosis technology and mechanical engineering solutions to a wide range of heavy industries such as semiconductor and oil and gas (O&G). It also specialises in engineering services, including coating, machining and grinding, manufacturing and precision cleaning.

It is worth noting that the company does not have a direct competitor listed in Malaysia, with its closest rival being Taiwan’s Shih Her Technologies Inc.

Over the years, Frontken has delivered consistent growth. It posted a record net profit of RM81.97 million for the financial year ended Dec 31, 2020 (FY2020), an increase of 18.5% from RM69.17 million in FY2019, underpinned by improved revenue and vigilance in cost management.

Revenue expanded 8.4% to RM368.32 million from RM339.91 million on the back of a strong performance by its subsidiary in Taiwan. The semiconductor and O&G segments contributed 85% and 15% respectively to its FY2020 revenue.

The total dividends for FY2020 amounted to 4 sen after the company’s recent declaration of a second interim dividend of 2.8 sen, which translates into a dividend yield of about 0.8%.

JF Apex Securities expects Frontken’s FY2021 net profit to climb 42.7% to RM116.9 million and a further 24% to RM145 million in FY2022. However, the earnings forecasts of Hong Leong Investment Bank (HLIB) are lower at RM100.8 million and RM122.5 million for FY2021 and FY2022 respectively.

JF Apex has a target price of RM5.78 for the stock while HLIB’s is RM5.82, representing an upside of 18.2% and 20.4% respectively from its current share price.

Frontken’s net cash position had risen significantly to RM312.2 million as at end-December 2020, from RM224.6 million a year ago. It had no bank borrowings.

Geographically, Taiwan remained the largest profit contributor in 4QFY2020, contributing 73% to operating profit, followed by Singapore (18%), Malaysia (6%) and the Philippines (3%).

Frontken intends to expand its capacity in Taiwan by setting up a new state-of-the-art facility in anticipation of an increase in demand for its services related to tools involved in the manufacturing of leading-edge chips. The facility is expected to commence operation in 2022 and is expected to further improve its profit margin.

Chairman and CEO Ng Wai Pin is the largest shareholder of Frontken, with an indirect stake of 20.41% through Dazzle Clean Ltd and a direct stake of 0.64%. The second largest shareholder is Ooi Keng Thye at 15.14%.


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