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Capacity expansion to drive Frontken’s future growth, says HLIB Research

Capacity expansion to drive Frontken’s future growth, says HLIB Research

26 Apr 2022

Frontken Corp Bhd’s Taiwan plant capacity expansion will drive the group’s future growth, according to Hong Leong Investment Bank (HLIB) Research.

In a note on Tuesday (April 26), HLIB analyst Tan J Young said Frontken’s Plant 2 Phase 1 expansion is expected to be completed by the first half ending June 30, 2022 (1HFY22), slightly ahead of its initially scheduled 2HFY22.

“Phase 2 and 3 extensions are expected to be completed by next year. Although Plant 2’s land size is almost the same as Plant 1, the former’s production capacity can be more than double as new technology requires less floor space,” he added.

The HLIB analyst said that based on the latest corporate update, the research house opined that contributions from the Taiwan Plant 2’s Phase 1 expansion will lift Frontken’s FY23 core net profit by 22%, while that of FY22 will remain unchanged.

Elsewhere, Tan said that Frontken is in negotiations with an original equipment manufacturer — an existing client in Taiwan — on a large volume-based project to support local foundries. He added that if the project materialises, further expansion will be required, for which it plans to repurpose idle space in its oil and gas (O&G) site.

“Capex (capital expenditure) for this project is estimated to be RM3.5 million to RM4 million, including the purchase of testing and measuring equipment. Labour issues have improved after Chinese New Year and it managed to hire some from China.

“The O&G business has improved a lot with more works and enquiries to the extent of insufficient space to put equipment while customers are very demanding. It has yet to observe any impact due to China’s Covid-19 lockdown and customers from Dalian continue to send parts to Singapore for cleaning,” the analyst added.

Tan maintained his “buy” call on Frontken but lowered his target price for the stock to RM3.20 (from RM4.36 previously) based on a price-earnings (P/E) multiple of 30 times (previously 50 times) FY23 earnings per share.

“Considering the US Fed’s hawkish stance to tame inflationary economy, we lower Frontken’s P/E valuation to 30 times, which is 0.5 standard deviation above its five-year P/E mean of 24 times. We like Frontken for its multi-year growth ahead on the back of: i) a sustainable global semiconductor market outlook; ii) robust fab investment; iii) leading-edge technology (7nm and below); and iv) a strong balance sheet (net cash of RM315 million or 20 sen per share) to support its Taiwan expansion,” he added. 

The analyst also said demand projections remain strong without order reduction thus far. 

“Frontken shared that it continued to experience the price pressure norm despite foundries increasing their average selling prices. 

“The earnings before interest, taxes, depreciation and amortisation (EBITDA) margin should increase thanks to the improvement in O&G and expecting O&G to achieve double-digit growth at the profit after tax level,” he added.

At the time of writing on Tuesday, Frontken shares had gained six sen or 2.33% to RM2.63, giving the group a market capitalisation of RM4.16 billion.

Source: The Edge Markets

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