Frontken to gain from 5G investments, cash haul

The huge investments in 5G and end-user applications will fuel demand for semiconductor and chips, and thus services of Frontken, says research house


FRONTKEN Corp Bhd is expected to benefit from the fifth-generation (5G) technology investment, its niche market segmentation and healthy balance sheet, said JF Apex Securities Bhd.

The research house has initiated a coverage on the company with a ‘Buy’ call and target price of RM4.33 with the assumption that Frontken stands to benefit from investments in the advanced technology, coupled with its diversified businesses and well-managed balance sheet.

The company shares closed the trading week at RM3.46 last Friday, valuing the company at RM3.63 billion.

The huge investments in 5G by developers such as Huawei Technologies Co Ltd, Nokia Corp, Ericsson and Samsung Group, and launches of corresponding end-user applications will fuel demand for semiconductor and chips, and thus services of Frontken, JF Apex said in a research note last week.

“We believe a massive amount of semiconductors and chips is needed in the next five years to cater to the demand of 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 smartdevice developers,” JF Apex stated.

The 5G infrastructure market is expected to grow at a 53% growth rate from 2020 to 2025, the research outfit noted.

Frontken is the leading precision cleaning service provider with a strong footprint in Malaysia, Singapore, Taiwan, Philippines, and Indonesia.

It mainly provides services such as precision cleaning, speciality coating and surface treatment to improve machinery lifetimes and yielding for semiconductor and chip foundries.

JF Apex noted that Frontken’s strategy to emphasise on research and development (R&D) in order to enjoy higher margins helped it transform itself in 2017.

Frontken started to invest heavily in its financial year 2016 (FY16) and FY17 to cater to the demand of 10nm and seven nm nodes technologies which were commercialised in 2018 and 2020 respectively, JF Apex stated.

While it is unlikely for the semiconductor sector to experience an immediate downturn, Frontken has expertise to serve other fields such as the thin-film-transistor liquid-crystal display which have a lower margin compared to the semiconductor segment.

“Frontken has been switching from the low-margin business to high value-added semiconductor and benefitted substantially with its significant capital and operational expenditures,” it said.

JF Apex expects Frontken to record a 16.6% compound annual growth rate of its profit from the FY19 to FY21, backed by the group’s semiconductor division.

It expects Frontken’s oil and gas engineering division to grow moderately due to the persistently low crude oil prices.

“We expect the growth engine to be driven by margin expansion instead of magnificent top-line growth due to its business nature.

“Frontken will be providing more value-added services with a higher margin for the latest commercial viable five nm nodes chips to one of the largest foundries in the world,” it said In addition, Frontken has been involved in advanced precision cleaning for the three nm R&D line, which will go into commercial production between 2021 and 2022, JF Apex said.

New lines have been added in Frontken’s plant in Taiwan recently with a lower cost by building upon its existing facilities and this will further propel Frontken’s capacity to take up more works in the future, the research house said.

Frontken held RM246.6 million or 44% of its total assets in cash as of the second quarter and its net cash position gives it a good platform to increase investment and capitalise any opportunity during these turbulent times, JF Apex said.

“We estimate the group will continue to remain in a net cash position for the next two years on the back of disciplined balance sheet management. Frontken has not fixed any dividend policy but dividends delivered to shareholders are traditionally increased in tandem with earnings growth,” it said.