Frontken Corporation Berhad (FRCB) endured its third consecutive earnings miss in 3Q23 as a pickup in semiconductor front-end activity in Taiwan and Singapore was overshadowed by a surprise withholding tax levy.
In its note today (Oct 25), Maybank Investment Bank Berhad (Maybank IB) said it cut FY23E earnings by 15% but maintain FY24/25E.
“Despite some easing of inventory overhang across the sector, we remain cautious over premature declarations of a recovery amidst sluggish global growth expectations,” he said.
Thus, the research house maintains its HOLD rating and TP of MYR3.50, pegged to 33 times FY24E PER, at about its LT Mean are maintained.
Maybank IB said FRCB’s result is below expectation, ex- one-offs (+MYR2.6 million), with net core net profit of MYR26.3 million, down by 20% YoY and down by10% QoQ in 3Q23.
“Cumulative core earnings in the first nine months of the financial year 2023 (9M23) of MYR78.7 million (-12%) came in below expectations at 57%/60% of ours/street’s FY23E.
“The earnings miss was primarily due to imposition of withholding taxes (MYR5.6m vs. MYR1.9m in FY22) on dividends paid out by its Taiwanese subsidiary, AGTC,” it said.
The research house notes that Taiwan levies a 12.5% tax on dividends paid out by resident corporations to foreign entities based in Malaysia.
Meanwhile, it said that the sequential turnover growth but OpEx weighs group turnover was flat (-1%) YoY but grew 10% QoQ amidst sequential pickup in demand across all three of its key geographical segments, Taiwan (+10%), Malaysia (+7%) and Singapore (+16%).
Maybank IB highlighted that earnings before interest and taxes (EBIT) margins however still dragged QoQ (-2ppts) from elevated fixed costs (labour, utilities) and a warranty claim from prior work done for a Taiwanese customer.
“Segmentally, Malaysia and Singapore operating margins improved 2ppts QoQ to 20% from stronger O&G workflows and higher memory customer volumes respectively.
“Coming off 2Q23’s record high (44%), TW margins dipped but remained healthy at 41%,” it said.
However, the research house said things may be looking up for FRCB, as according to Semiconductor Industry Association (SIA) latest data, global semiconductor sales saw its 6th consecutive MoM uptick in August, indicative that the industry’s overhang is nearing its bottom.
“This sentiment was echoed by FRCB’s key Taiwanese foundry customer last week, when it provided a cautiously upbeat outlook for CY24.
“Despite the challenging macro climate and weak Chinese economy, we believe FRCB is well-equipped to capitalize on a potential recovery (via its expanded P2 facility in Kaohsiung) when its major customer eventually ramps-up production of leading-edge nodes to full capacity next year,” it added.
