Case Study of Frontken Corporation Berhad (0128)

By Stella Goh – Market Data Analyst | 9 January 2020


Overview 

Frontken Corporation Berhad is an established Malaysia-based investment holding and provision management services company founded in the Year 1996, primarily involved as a leading service provider of surface and mechanical engineering in the Asia Pacific region.  

FROTNKN was listed on ACE Market in the Year 2006 and successfully transformed into Main Market of Bursa Malaysia on 19 November 2008. Most of the key players of FRONTKN in oil and gas (O&G), petrochemical, power generation, semiconductor and electronics manufacturing industries come from Singapore market, while the group also has a presence in Malaysia, Philippines, Indonesia, Thailand, Vietnam and Japan.  


Business Model 

Frontken Corporation Berhad was principally involved in the business by providing various specialised engineering services such as thermal spray coating, cold build coating, plating and conversion coating, specialised welding, precision cleaning abrasive blasting, machining and grinding. 

Through the surface technologies, the group provides components protection, lifetime expansion, performance and efficiency improvement to customer’s equipment. FRONTKN also provides assessment, assembly, balancing, recovery and upgrading work on industrial rotating or non-rotating equipment such as pumps, turbines, compressors, diesel engines, generators and motors. 


Financial Review 


Based on the past 5 financial years of revenue chart above, the group has successfully recorded a considerable RM30,637 million increase in revenue, translating to a growth of 10.33% from RM296.6 million in FY2017 to RM327.2 million in FY2018. Based on 5 years CAGR basis, the group has grown 11.41%. The increase in revenue was mainly due to the growth of semiconductor-related business with strong support from its customers and improvement in engineering business from their subsidiaries in Malaysia, Singapore and Taiwan. 


Frontken Corporation Berhad has successfully achieved a tremendous high record of gross profit by 20.75% from RM104.8 million in FY2017 to RM126.6 million in FY2018. Based on the past 5 years of CAGR basis, the gross profit has grown 21.02%. The growth of gross profit was mainly driven by stronger demand in the cloud computing business, demand for a wafer of LED chips, ramp up production of advanced node chip and the better performance from their oil and gas (O&G) division. 


The Profit after Tax (PAT) of FRONTKN rose 56.56% from RM36.4 million in FY2017 to a new high of RM57 million in FY2018. On a CAGR basis, the Profit After Tax (PAT) grew by 161.67% was in line with the growth of revenue and gross profit. 

Cash Flow Statements 

The group has generated net cash from operating activities of RM63.3 million in FY2018 as compared to RM69 million in the previous year. The decrease in net cash from operating activities was mainly due to the increase in working capital requirements and taxes paid for the group’s ongoing operations. Even though the cash flow is lesser in FY2018, the company still has enough cash used for business expansion.  

The net cash from investing activities in FY2018 is (-RM7.1 million) was mainly due to the purchase of property, plant and equipment (PPE) (RM7.5 million) and additional investment or acquisition of subsidiaries (RM7.1 million). The negative cash flow indicates that the firm is investing more in its business to grow.  

The net cash from financing activities in FY2018 is in the negative zone (-RM27.8 million) was primarily due to repayment of term loans (RM16.7 million). The others factor including interest payment (RM0.568 million), the dividend issued by the company (RM7.3 million), a dividend paid by the subsidiary to non-controlling interests party (RM2.6 million) and payment of hire purchase payables (RM0.545 million).  

Based on liquidity ratio calculation, FRONTKN has a current ratio of 2.8303 times in FY2018 compared to 2.2225 times in FY2017 indicates that the company do not face any liquidity issue as they are capable to pay back its liabilities if any unforeseeable circumstances occurred by using current assets such as inventories, trade receivables, deposits, prepaid expenses, amount owing by subsidiaries, amount owing by associate, current tax assets, short-term investments, fixed deposits with licensed banks, cash and bank balances amounted to RM277.6 million. 

Prospect and Challenges  

According to the chairman and chief executive officer (CEO) Nicholas Ng, the group is seeing more opportunities in oil and gas (O&G) sector, especially with more activities in Pengerang, Johor where the Petronas Refinery and Petronas Chemical Integrated Development (Rapid) project is developed. (Source: TheEdge, 25 March 2019) 

Through Research & Development, the group will innovate more efficient ways in advanced materials and surface engineering technology to produce new and improved coatings which will use in protection against material degradation and to improve the productivity of industrial processes. (Source: Annual Report 2018). The demand for semiconductor will accelerate further once 5G is rolled out globally. (Source: Quarterly Report, 20 September 2019). 

FRONTKN also plans to strengthen its foothold in the Chinese market where it sees huge opportunities and probably involves in setting up new facilities, instead of servicing China-based clients from its existing Taiwan and Singapore facilities. (Source: TheEdge, 25 March 2019) 

The group also will take some time to identify a strategic location for the new facility to be closer to most major wafer fabrication equipment sprawled across the country. By 2020, the group should be able to cater to its customers’ wafer fabrication process node of up to five nanometers. (Source: TheEdge, 25 March 2019) 

Rating System

Return on Equity (ROE) = Average 

Revenue [6 years CAGR] = Average 

Net Earnings [6 years CAGR] = Excellent 

Basic Earnings per Share (EPS) [6 years CAGR] = Excellent 

Interest Coverage = Excellent 

My Insight

Based on my calculation on Discounted Earnings Model, Frontken Corporation Berhad has a fair value of RM7.72. The current market value of FRONTKN is RM2.38 which is undervalued. (Based on 6Jan2020). FRONTKN has a beta of 1.229 (500 days) indicates that the company is more volatile than the current market, which also indicates investors / traders are actively trading in this stock. While for short-term trader, they may face a higher risk. Based on my computation of Compound Annual Growth Rate (CAGR), FRONTKN has an expected market return of 5.59%.  FRONTKN has also achieved a double-digit of Return on Equity (ROE) which is 16.08% in FY2018 considered as healthy as compared to 10.60% in FY2017. 

In conclusion, Frontken Corporation Berhad has achieved outstanding performance in FY2018 as the revenue, gross profit and net profit achieved a new high over the past year. FRONTKN prospect remains bright by looking at the growth of semiconductor and Oil & Gas division. I believe the company can grow very well in future as the Internet of Things (IoT) and Industry 4.0 will need much high-end equipment to test and automate. 

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