JF Apex initiates coverage of Frontken, target price at RM4.33

KUALA LUMPUR (Aug 13): JF Apex Research has initiated coverage of Frontken Corp Bhd at RM3.47 as the “under-researched” company is seen to benefit from fifth-generation (5G) technology investment and that it serves a niche market with low competition and a high barrier to entry.

In a note today, the research house placed a “buy” call on the counter with a target price (TP) of RM4.33, which offers a 24.8% upside to its last closing price of RM3.47.

Frontken is involved in precision cleaning and parts supply for machinery for semiconductor and chip foundries and may benefit from incoming 5G investments in the country, said JF Apex.

“Seeing the huge investments taking place, by 5G developers such as Huawei, Nokia, Ericsson, Samsung and others, as well as the launching of the corresponding end-use applications, the 5G infrastructure market is expected to grow at a 53.01% CAGR (compound annual growth rate) from 2020 to 2025.

“We believe a massive amount of semiconductors and chips are needed in the next five years in order to cater to demand for 5G smart devices including smartphones, laptops, wearable devices and tablets. As a result, foundries will need more maintenance services for machinery to fulfil substantial chip orders from global smart device developers,” said the research house.

It sees Frontken’s bottom line growing at a CAGR of 16.6% from FY19 to FY21, underpinned by its semiconductor division, while the oil and gas (O&G) engineering division is expected to grow moderately due to low crude oil prices.

Frontken’s growth will be driven by margin expansion rather than top-line growth, said JF Apex, as the company will be providing more value-added services for the latest commercially viable 5nm node chips to one of the largest foundries in the world.

JF Apex said the company’s focus on research and development (R&D) resulted in its transformation in 2017 seeing significant profit growth, with its earnings before interest, taxes, depreciation and amortisation (Ebitda) margin increasing to 34% in 2019 from 22% in 2017, while revenue growth was restrained at a CAGR of 4.63% from 2017 to 2019.

This is on top of advanced precision cleaning for the 3nm R&D line, which will see commercial production of these chips sometime in 2021 or 2022.

The company has also added new lines at its Taiwan plant, which will allow it to take on more work in the future.

“Frontken has been top-notch in the segment for almost a decade globally. The segment has not seen any new player for five to eight years due to huge initial investment and fast-changing technology developments.

“We understand that there is no direct competitor in Malaysia but the closest one is in Taiwan, which is Shih Her Technologies Inc, while others are non-listed companies,” JF Apex said.

The company’s expansion is also backed by a sturdy balance sheet, said the research house, noting its RM246.6 million cash pile, which provides a good platform for Frontken to increase investment and capitalise on opportunities during turbulent times.

At 10.34am, Frontken had risen eight sen or 2.31% to RM3.55, giving it a market capitalisation of RM3.74 billion.

Source: TheEdgeMarkets