Frontken Corp kicked-off FY24 on a strong note in 1Q, with outperformance at its TW and MY subsidiaries (collectively accounting for 85%/92% of group turnover/earnings). Kenanga is maintaining its FY24-26E earnings call and placing a BUY rating with a TP of MYR4.75.
The company remains a top pick for Malaysia semicon, for its unique high-margin exposure to the world’s leading TW-based wafer chip manufacturer.
Results within expectations
Ex-one offs (-MYR3.4m, including unrealised FX gains of MYR2.7m), FRCB‘s 1Q24 core net profit of MYR26.7m (+16% YoY, -18% QoQ) met expectations at 16%/15% of ours/consensus’ FY24E earnings. Group turnover in 1Q24 of MYR140.5m was FRCB’s highest quarterly revenue on record, despite historically weak seasonality in 1H. Buoyed by the continued ramp-up of volumes at its P2 plant in Kaohsiung, the house expect earnings delivery in the remaining quarters of FY24 to be stronger.
TW margins at all-time high (with room for more)
TW and MY both posted quarterly turnover highs of MYR90.5m and MYR29.1m. Positively, EBIT margins for TW has reverted to its previous record high of 44% with mgmt indicating there is scope for further expansion if optimum utilisation is attained in 2H24. However, 1Q24 CNP margins contracted 1ppt YoY/6ppts QoQ, primarily from an increase in tax charges due to one-off provisioning for undistributed earnings surtax in TW. Kenanga says it expects FRCB’s elevated 1Q24 ETR (34%) to normalise sequentially. SG memory woes likely to dissipate soon
The house believes that FRCB has reached an inflection point and its outlook now appears bright. Previously tepid volume delivery from its memory-heavy SG-base customers will likely alleviate amidst robust global demand for high-bandwidth memory (HBM) chips used in AI processing. Elsewhere, its main TW customer is also a direct beneficiary of resilient demand for GPU chipsets used in AI-based applications/services. BUY rating maintained.
