Frontken Corp Bhd, winner of the coveted The Edge BRC Company of the Year award for 2022, is a low-profile net cash technology company that supports big names in the global semiconductor industry as well as Malaysia’s very own oil and gas giant Petroliam National Bhd (Petronas).
Concerns over how a global chip shortage may have morphed into a global chip oversupply crisis have knocked down Frontken’s market capitalisation, which reached as high as RM6.6 billion when its share price was above RM4 in early April this year.
Yet, closing at RM2.48 on Oct 28 to reflect a market cap of RM3.9 billion, Frontken’s share price was still more than five times the 44.6 sen that it started 2019 with.
Frontken’s market cap was only RM738.8 million as at end-2018, but had soared to RM2.4 billion by end-2019. It did not stop there, rising further to RM3.72 billion by end-2020 and RM6.3 billion by end-2021 before peaking at RM6.57 billion on April 1, 2022.
The gains came on the back of double-digit earnings growth as revenue charted new record highs because of strong demand from its global customers in the semiconductor as well as oil and gas (O&G) industries. Profit after tax grew at an enviable 44% compound annual growth rate (CAGR), from RM4.2 million in FY2012 to RM114.2 million in FY2021, even as revenue saw an 11% CAGR from RM181 million in FY2012 to RM450.2 million revenue in FY2021.
Shareholders were rewarded with higher dividends, with the payout ratio doubling to 60% in FY2021 from 30% in FY2018, as well as a warrant-sweetened 1-for-2 bonus issue in April 2021.
In addition, the group had been investing in its growth with internal cash rather than excessive borrowings. As at end-2021, it had RM302.4 million in cash and cash equivalents after spending RM82.8 million on capital expenditure.
There is no denying that sizeable amounts of the strong share price gains seen between 2019 and early 2022 have been given up in the past six months, with Frontken shares down 38% year to date and underperforming the local bellwether FBM KLCI, which is down just under 8% over the same period.
Part of the price pressure that Frontken has seen stems from news flow on Taiwan, where most of the world’s advanced chips are being manufactured but which has come under the spotlight as tensions between Washington and Beijing grow. Taiwan Semiconductor Manufacturing Co Ltd, which dominates the global supply of semiconductors by making chips for a host of global giants such as Apple Inc and fabless chipmaker Advanced Micro Devices Inc, has also dropped 39% year to date.
Frontken’s unit, Ares Green Technology Corp, has seen profits grow on the back of its ability to handle more complicated and sophisticated processes that are more sensitive to contamination and that have won the trust of larger global clients. In 2020, the company paid about RM53.3 million for an industrial building in Southern Taiwan Science Park (STSP), Kaohsiung (Plant 2), which Frontken says allows the company to position itself as “the leading advanced high-precision chamber parts service provider for the next few generations of leading-edge chips”.
STSP is one of the three main science-based industrial parks in Taiwan that have been “selected by the world’s leading integrated foundry for its 5nm and 3nm advanced manufacturing processes, making STSP the world’s largest IC industrial hub”, notes appended to Frontken’s 2021 annual report state. “The infrastructure and size of this plant will provide us with sufficient space to further expand our production capacity.”
“New Plant 2 is qualified by customer and will be receiving parts for test run,” Hong Leong Investment Bank Research (HLIB) says in a note dated Nov 2, following the release of Frontken’s earnings for the nine months ended Sept 30, 2022 (9MFY2022), which saw a net profit at RM93.45 million, up 25% from RM74.96 million in 9MFY2021 on the back of a 16% year-on-year growth in revenue to RM381.91 million.
“Despite the inventory adjustment and slower macroeconomic growth, a Taiwanese client expects these negatives to be balanced by sustainable ramp-up of its industry-leading advanced technologies. Frontken believes the persistent demand remains a growth catalyst and will lead to more chip research, design and manufacturing in the years ahead,” HLIB says in the note, reiterating a “buy” call on Frontken, with an unchanged target price of RM3.20, based on 30 times FY2023 earnings multiple.
“We like Frontken for its multi-year growth ahead on the back of a sustainable global semiconductor market outlook, robust fab investment, leading edge technology (7nm and below), and strong balance sheet (net cash of RM296 million, or 18.7 sen per share) to support its Taiwan and Singapore semiconductor expansions,” HLIB adds. It notes that 80% of revenue is from semiconductor and 20% from O&G. “Frontken is cautiously optimistic that business will be strong for the remaining months of FY2022, owing to increased orders under Petronas contracts,” the note says.
Frontken will continue to invest in bolstering its own core competencies to stay ahead, confident that the longer-term prospects for the industry in which it operates remain bright.
Frontken chairman and CEO Nicholas Ng Wai Pin tells The Edge: “We are excited about what lies ahead for us. We believe that, in the long run, the semiconductor industry will continue to grow because of the heavy reliance on technology, which augurs well for our company. To that end, we are looking to expand our business further both regionally and globally.
“Through the continual support from all our customers and technology partners, we believe the long-term outlook for our company is good in spite of the many challenges that we face in the short term.”
Indeed, when the pandemic hit, Frontken had told shareholders in its 2021 annual report that its continuous research and development as well as investment in high-specification equipment and technology allowed it to help customers improve efficiencies and reduce operating costs without compromising on the quality of their end-product.
With chips being increasingly used in more things, Frontken should remain on the radar for some time.
“We are humbled to receive this award and appreciate the recognition bestowed upon us. This award means a lot to us and it is testament to the years of hard work and dedication by our amazing team. This award will motivate us to work harder and reach greater heights. We would like to thank everyone, especially our stakeholders, for believing in us and supporting us throughout the years. Lastly, our sincere appreciation to The Edge for this recognition,” says Ng.