This article first appeared in The Edge Malaysia Weekly on April 26, 2021 - May 2, 2021
AFTER achieving yet another record earnings in the financial year ended Dec 31, 2020 (FY2020), Frontken Corp Bhd remains optimistic about its prospects and expects to do the same in the current financial year, as it eyes double-digit growth to its bottom line.
“Our focus is not on lumpy earnings. What we really want is to manage growth, and we want sustainable growth,” its chairman and CEO Nicholas Ng Wai Pin tells The Edge.
In fact, the group has been seeing double-digit growth in earnings since FY2016.
“Right now, we are growing at a pace that we are comfortable with and I think the future is very exciting for us,” he says, adding that the best is yet to come for Frontken.
Ng believes that barring any unforeseen circumstances, this will be a better year than FY2020, in view of the increase in demand and inquiries about its services from customers. “We expect demand to pick up further, which means there is still work out there. And from what we are seeing, it is encouraging,” he says, describing the growth — especially from the semiconductor industry — to be “fairly strong”.
Incorporated in 1996, Frontken is involved in advanced precision cleaning and surface treatment for semiconductor process chamber parts and repair and maintenance services for the oil and gas industry.
For FY2020, the company posted a net profit of RM81.97 million, up 18.5% from RM69.17 million a year earlier, while revenue increased 8.4% to RM368.32 million from RM339.91 million.
In line with the higher net profit, Frontken’s share price has been on an upward trajectory, peaking at RM5.40 on Feb 25. The counter, which had gained 145% year on year, closed at RM5.18 last Thursday to give the company a market capitalisation of RM5.46 billion.
Frontken’s share price growth over the past five years has been remarkable, rising some 33 times from 16 sen. Notably, the stock first breached the RM1 level in April 2019.
To reward its shareholders, Frontken has proposed a bonus issue of shares and warrants, on the basis of one bonus share and one bonus warrant for every two shares held. The ex-date for the bonus issue is this Tuesday (April 27).
The company has been declaring dividends regularly over the years. For FY2020, it paid out a total of four sen per share, compared with 2.5 sen the previous year.
According to Bloomberg data, three research houses are covering the company. They all have a “buy” call on the stock, with a consensus target price of RM5.82, implying an upside of 12.4% from last Thursday’s closing price.
All three research firms are projecting a net profit of more than RM100 million in FY2021. JF Apex Securities has the highest forecast at RM117 million.
With the global semiconductor industry expected to continue seeing robust growth in the years to come, along with the gradual rollout of 5G networks worldwide, Frontken is already planning its expansion to cater for future demand in tandem with its customers’ guidance, which rides on this trend.
Ng says the company is exploring facilities overseas where it has no presence yet, such as China, Europe and the US. “We are also looking to buy more land in locations near our customers — because if our production flow improves, so will our margins.”
Frontken currently has production facilities in Malaysia, Singapore, Taiwan and the Philippines. Geographically, Taiwan is its key market, contributing 65% to its total revenue in FY2020.
The company is setting aside about RM100 million in capital expenditure (capex) for plants alone this year. As at Dec 31, 2020, it had net cash of RM312.19 million.
To cater for the extraordinary demand, the company will be buying additional facilities along the way, says Ng.
Earlier this month, Frontken’s Taiwainese unit purchased an industrial property for NT$367.5 million (RM53.29 million) cash to expand its production capacity there to meet the growing demand from its semiconductor customers. The facility, which should be up and running by year end, is expected to more than double the group’s physical operating and production space in Taiwan.
“With the new facility in Taiwan, we will be able to expand our range of services,” says Ng, without elaborating on the services. This purchase was made at the right time, he adds, in anticipation of the rollout of the three-nanometer chips and higher volume of the existing node chips.
Frontken is also exploring potential merger and acquisition (M&A) opportunities overseas. “We want to buy something for the long term and [one that] adds value, rather than just being synergistic,” says Ng.
It is already looking at a few companies. “For some of these acquisitions, you really need to be there to look at them physically. But due to the current travel restrictions, it makes things a little harder,” he adds.
Ng wants Frontken to run at its most efficient levels, on top of growing sustainably. “We are doing that now, but we believe we can further improve our efficiency,” he notes.
“It is more about doing what we do a lot better and faster and at a lower cost, which improves efficiency and, in turn, gives better margins,” he explains, adding that the company continues to provide rebates and discounts to customers yearly.
Rather than passing on the costs to its customers, Frontken has a price reduction road map that helps to improve its production flow, allowing for shortened processes that translates into cost savings. “Every year, we have a team to identify the top three costs and see how we can reduce them,” says Ng, adding that the company has invested a lot in technology to improve efficiency.
While its top-line growth is not as robust as its net profit growth, Frontken’s net profit margin had grown steadily to 22% in FY2020 from 20% in FY2019 and 16% in FY2018, thanks to its cost optimisation efforts.
When asked about other rationalisation efforts at its existing facilities, he says, “It all depends on the need. We can’t just do it if it disrupts our operations.”
There is only so much you can change without disrupting production at the existing facilities, he points out. The new facilities, on the other hand, allow the company to build according to the best workflow, given that cleaning processes have changed over the years.
Ng is Frontken’s largest shareholder with a 21.05% stake, mostly via Dazzle Clean Ltd (20.41%), a wholly-owned unit of Singapore-based private equity firm Dymon Asia, in which he is a substantial shareholder.
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