Frontken Corp. Bhd (FRCB MK) fared sequentially better in 2Q23 but earnings still lagged YoY, whilst a 3Q23 pick-up in orders remains marginal/muted vs 3Q22.
Maybank Investment Bank (Maybank IB) lowered FRCB’s FY23E earnings estimates by 8% but raised FY24/25E projections by 4%/6% on growing optimism of a broad-based semicon recovery next year.
Maybank IB’s HOLD rating is maintained, while TP is raised to MYR3.50 (+4%), still pegged to 33x FY24E PER its LT Mean.
The bank prefers GREATEC MK (BUY; TP: MYR6.05) for tech hardware.
1H23 results below expectations Ex- one-offs (+MYR2.6m), FRCB’s 2Q23 core net profit was MYR29.3m (-5% YoY, +27% QoQ).
Notwithstanding a marked improvement in QoQ core earnings and expectations of a seasonally-better 2H, 1H23 results came in below expectations at just 35/36% of ours/consensus FY23E.
An interim dividend was also not declared (2Q22: 1.6 sen).
Despite a pickup in group turnover QoQ (+6%) across its key geographical segments of TW (+7%), SG (+12%), & MY (+1%), top-line still dragged on a YoY basis (-6%) owing to persisting softness amongst semicon customers in TW (-9%) and memorycentric SG (-11%).
Positively however, semicon’s mkt share as a % of total revenue inched up slightly QoQ to 78% (1Q23: 77%). Surprise pick-up in TW operating margins despite the top-line drag, group EBIT margins (36%; +1ppts YoY, +5ppts QoQ) were the highest on record, underpinned by improving process and cost efficiencies at its TW & MY ops.
TW’s operating margin of 44% (+2ppts YoY, +6 ppts QoQ) was also at a record high (a positive surprise, in our view) and partially attributable to the gradual ramp-up in activity at its P2 plant in Kaohsiung (+c.30% floorspace).
A strong uptick in umbrella contracts from Petronas Group also helped its O&G-heavy MY ops register better EBIT margins (+2/+3 ppts YoY/QoQ).
Meanwhile, realised FX gains of MYR1.6m (1Q23: -MYR0.4m) provided a sequential bottom-line boost. Revising estimates; expect better in FY24
Although Maybankk IB opines the memory market may remain sluggish in 2H23, the bank is increasingly optimistic that general end-demand recovery for semicon will materialise next year, buttressed by year-end flagship smartphone launches and supported by the underlying strength of the logic chip market (demand for key customer’s most advanced leading-edge nodes remains resilient).
As such, the bank trims their FY23E earnings by 8% but raise FY24/25E by 4%/6% respectively, the latter on the back of improving efficiency gains and better operational leverage at FRCB’s P2 plant in TW.
