Business Overview:
Frontken Corp (market cap RM403.47m) is mainly involved in precise cleaning for the semiconductor, oil and gas as well as general industries. It is also involved in the restorative, maintenance works for the mechanical parts across various industries.
Its customers include foundries like TSMC, UMC, Micron, ASM and Intel. They also have fabless customers such as Qualcomm. No one single customer contributes more than 10% of its overall sales.
Market Position:
In Malaysia, its market share is estimated at 90%, in Singapore it is 30%. In Taiwan, there are 13 to 15 notable suppliers and Ares GreenTech is considerably one of the top 5 in terms of sales. One comparable company listed on the Taiwan stock exchange is Shih Her Tech.
The company targets the 28nm and below market, which is much more specialised and potentially offer better margins.
Working relationship with the main customers started since establishment. It is also in the midst of securing new customers.
The work processes carried out are highly combustible so customers usually spread out the work. That said, there is also a barrier of entry as a new comer will need at least a year to qualify itself while job processes require a few months to be audited and qualified.
Shining Star Ares GreenTech
The company has been increasing its stake in Ares Greentech which was listed in Taiwan. Frontken has raised its stake from 73% to 85% in one year.
The 12% stake which was bought for RM12m, was completed middle this year. From next quarter onwards, MI will be lower as a result. Purely based on this, PATAMI is expected to improve by ~RM1.5m going forward.
This is one of the important contributor of the semiconductor growth to the group, which has also increase Taiwan’s sales contribution from 38% in FY15 to 48% in FY16.
Management might consider to increase its stake in Ares GreenTech but it depends on the pricing.
What else could Frontken do with its cash of RM77m?
It may keep the cash as reserves in case market turns bad. It has allocated RM35m for capex in the past two years so it doesn’t foresee huge capex going forward. Only RM1-2m p.a. for maintenance capex.
Dividend might be a possibility but it depends on how well the company does and whether the good earnings will continue. Historically, the company has only paid out dividends twice (at about 1% yield) so we do not expect exciting dividends if any.
It has also invested a lot in R&D over the years.
Outlook:
The big ramp up in FY18 will be from orders growth from its major customers, which is supported by its higher capacity. This is in anticipation of new products and higher demand of consumer electronic devices that require chips.
Its focus will be on high margin jobs and it will continue to look for jobs that require even more precise cleaning.
Historically, Q1 is the weakest. Meanwhile, the highest delivery of the semiconductor sector range from September to November when Fontken will also get busier.
Note that the new expansion at Ares GreenTech was completed in March in year. Its other new facilities include a Class 10 clean room.
Risks:
Forex risk: About 75% of its sales are in foreign currency.
Lower than expected jobs replenishment.
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