Frontken Corporation Berhad (FCB) (KLSE:FRONTKN) is a leading service provider of advanced precision cleaning and surface treatment for semiconductor process chamber parts and repair and maintenance services for the oil and gas industry.  To date, the group has facilities in Singapore, Malaysia, Taiwan, the Philippines and Indonesia, with 1,130 employees. 

The stock has been a multi-bagger for its investors, its share price has grown over 1,100% in value over the past 5 years. 

In this article, we will take a closer look at Frontken’s business profile, management, and financials, to assess whether the company is suitable for investment. 

Business overview

FCB provides the following service using its surface metamorphosis technology to its customers:

(a) advanced thermal spray coating services;

(b) advanced precision cleaning, recycling and refurbishment services; and
(c) advanced materials engineering research and development support services.

Source: Company Website


The group’s surface metamorphosis technology consists of:

  • Core Technologies – the group’s core technologies are in the areas of thermal spray technologies, including plasma spraying, HVOF spraying, rokide ceramic spraying, electric arc spraying, flame wire metallizing, flame powder spraying technologies.
  • Complementary Technologies – the group’s complementary technologies are in the areas of abrasive blasting, precision chemical cleaning, carbon dioxide cleaning, mechanical services, machining, plasma transferred arc cladding, balancing and cleanroom technologies. 

The group uses cutting edge technology in advanced precision cleaning, advanced surface treatment and specialty spray coating to extend the lifespan of the high precision tools/ equipment used in the fabrication of wafers, while significantly improving its customer’s process efficiency, operating and maintenance costs.

FCB’s continuous focus on research and development has helped its customers improve their process tool part optimisation. The group is able to constantly exceed customers’ expectations by re-designing some of the tools to further increase the parts’ shelf life and at the same time reducing the impact on the environment. 

The group’s customer portfolio comprises key players in the semiconductor, optoelectronics, oil and gas and petrochemical industries around the world. Meanwhile, it’s key customer locations include Taiwan, Malaysia and Singapore.

(Source: 2019 annual report)

Industry players and market position

According to FCB’s IPO prospectus, there is no published data on the market size of the thermal spray coating industry and precision cleaning in Southeast Asia. However, as the region becomes more industrialised, demand for these services is expected to increase. 

FCB believes it is a leading regional player in advanced materials and surface metamorphosis technology with thermal spray as its core. Most of the thermal spray coating service providers in Singapore and Malaysia do not compete directly with the group. Plasma Precision Technology Pte Ltd, CRC Engineering Pte Ltd and See Hup Seng Ltd are probably the closest competitors to FCB in that they offer thermal spray coating services for the oil and gas and petrochemical industries, albeit in a much smaller scale. 

Reliance on the semiconductor industry 

The group’s business activities are predominantly focused on the semiconductor, power generation, petrochemical, and oil and gas sectors, with semiconductor contributing approximately 78.3% of its revenue in 2019. In the semiconductor sector, the group provides services to the front-end semiconductor manufacturing (wafer fabrication), storage media manufacturing, flat panel display manufacturing and organic light-emitting diode (OLED) industries. 

The semiconductor industry (in particular, the front-end semiconductor manufacturing sector) is cyclical and has historically experienced periodic downturns. This cycle is influenced by the nature of the business, the way semiconductor companies plan and execute their investment plans and the cycle time required to add new manufacturing facilities to their operations. Any downturn in the semiconductor industry would adversely affect the utilisation rates of production equipment, which in turn, would reduce the demand for thermal spray coating and precision cleaning services. 

Looking forward

FCB remains cautiously optimistic of growth in its business despite the Covid-19 pandemic. The group is in the process of expanding its facility in Taiwan to better cater for anticipated increased business from customers. FCB expects the new cleaning lines to be ready by 3Q 2020 and should start contributing to its bottom line in 4Q 2020. 

To stay at the forefront of its industry, FCB will allocate capital where necessary, such as investing in its existing facilities including adding advanced metrology, testing and inspection equipment and introducing more automation to its processes with the view to ensuring consistent high-quality end results. 

Major shareholders and leaders

The group is spearheaded by its Chairman and Chief Executive Officer (CEO), Mr. Ng Wai Pin. He was appointed to the Board on 10 April 2006 and was re-designated as Chairman and CEO on 29 March 2018. He graduated with a Law degree from the University of Auckland and was admitted to the roll of barristers and solicitors of the High Court of New Zealand in 1989. 

Mr. Ng has over 14 years of experience in the semiconductor space and is the largest equity shareholder of Frontken with a direct and indirect equity stake of 28.5%. 

Dr. Tay Kiang Meng is the Executive Director and Chief Scientist of FCB. He is responsible for leading the group’s technology roadmap, spearheading research & development activities, formalizing the group’s quality systems, developing critical manufacturing technologies for FCB’s semiconductor technology and advanced materials engineering, and exploring new technology opportunities for the group. 

Dr. Tay has more than 20 years of professional experience in technology development and was appointed to the Board of FCB on 10 April 2006. He holds an equity stake of 0.9% in the group. 

(Source: 2019 annual report)

Financials  

Measure 1: Growth in revenue and profits

FCB has achieved growth in revenue and profits at compounded annual growth rates (CAGR) of 1.9% and 29.8% from 2014 to 2019. The group has not been able to grow its revenue meaningfully as sales growth in its semiconductor segment has largely been tempered by sales decline in its oil and gas segment. 

Measure 2: Profitability

FCB’s gross profit margins have doubled from 21.8% in 2014 to 43.6% in 2019; while its net profit margins have more than tripled from 6.1% in 2014 to 20.4% in 2019. Meanwhile, the group’s return on equity ratios have improved substantially over the same period from 7.8% in 2014 to 17.4% in 2019. 

Measure 3: Liquidity

FCB’s current and cash ratios are both at healthy levels. The group also does not have gearing issues as it is in a net cash position. As at 31 December 2019, FCB has cash and cash equivalents of RM214.8 million versus total borrowings of RM0.8 million.

Round 4: Dividends payout

FCB has rewarded shareholders with increasing dividends per share in line with increasing profits. In recent years, the dividend payout ratio has increased from 17.4% of profits in 2017 to 37.9% of profits in 2019. 

Conclusion

With a closing share price of RM3.47 as at 21 July 2020, FCB is trading at a price to earnings (PE) ratio of 51, with a market capitalisation of RM3.66 billion. 

FCB operates in industries which are highly cyclical. The group faces challenging business and downside risks due to heightened global concerns over the impact of Covid-19 on the world economy. The significant drop in crude oil prices has added another layer of uncertainty to the market outlook. 

While financially stable, investors looking to invest in this group must be comfortable with the complexities of the industries that it operates in – supply and demand trends can be volatile and a downturn could badly affect the performance of the group. 


(Source: Google Finance)

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