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All eyes on Frontken

Growth strategy: Frontken’s plant in Kulim Hi-Tech Park. Over the last three years, Frontken has switched its focus from heavy oil and gas-related services to higher margin semiconductor services.

Growth strategy: Frontken’s plant in Kulim Hi-Tech Park. Over the last three years, Frontken has switched its focus from heavy oil and gas-related services to higher margin semiconductor services.

Despite the sudden selldown its prospects look positive

FRONTKEN Corp Bhd has very much been in the spotlight this week.

In fact, it has pretty much hogged the trading volume list over the last few months, almost always being among the top 10 most actively traded counters of the day. This has somehow created the perception that the stock is more hype than real business.

Frontken had also been in the news over the years as a company that could possibly see new major shareholders emerging or becoming a privatisation target by its owners. What is for certain though, is that the financials of the company have been improving since 2015.

The stock is also clearly a favourite with some investors, as it was up some 130% prior to its fall last on Monday, Aug 7.

Last Monday, after 4pm, Frontken’s shares suddenly experienced a selldown, causing its price to plunge by 20% or 8.5 sen to 33.5 sen. Some 178.8 million shares changed hands and it was the most actively traded counter of the day.

Dealers say Fronken’s share drop may have spooked the market. Selling of Frontken’s shares continued during Tuesday morning session. This may have caused a domino effect which saw other small-cap tech stocks also fall. By the afternoon trading session though, Frontken had stabilised and recovered back to its Monday’s close of 33.5 sen.

To be fair to Frontken, despite the year-to-date run up in its stock, the stock’s price-to-earnings ratio was still palatable.

At Thursday’s close of 32.5 sen, it is trading at a historical 2016 price-to-earnings ratio of some 15 times. It is also in a solid net cash position of RM65.7mil or 6.3 sen per share.

Nonetheless, tongues were wagging, brokers were talking and investors were jittery. Who was the big seller?

A check on Bloomberg shows that the major shareholders of the company continues to be CP Asia Holding GMBH with 27.8%, Ooi Keng Thye with 13.5% and Cheng Chew Giap with 2.6%.

Dr Jorg Helmut Hohnloser is the major shareholder of CP Asia.

Hohnloser is also a director of Frontken. He first bought into the company back in 2010 via CP Asia, and increased his stake up to its present 27.75%.

Hohnloser was a major shareholder of a European company called Cleanpart GmBH, which is the holding company of CP Asia. Cleanpart provides the same services as Frontken – maintaining of equipment in the semiconductor and other industries.

In the past, there has been much speculation and reports that Hohnloser was looking to strengthen his control in the company. This rumour has since died down.

In November last year, Hohnloser ceased to have an indirect interest in Frontken via his shareholdings in CP Asia as he had ceased to be a shareholder of Cleanpart.

On May 10, Hohnloser was redesignated to independent director from his previous position of non-independent director.

Meanwhile, the managing director and chairman of Frontken is Ng Wai Pin, who was appointed in 2012, when he took over from the company’s co-founder, Willy Wong Hua Choon.

Ng was redesignated to the new position from senior independent non-executive director previously. Ng has a direct stake of 0.52% or 5.5 million shares. On Aug 8, he bought 500,000 shares at 33 sen from the open market.

Ng is also chairman of Ares Green Technology Corp, Frontken’s 84.6% subsidiary.

Improving financials

Frontken is a provider of surface metamorphosis and mechanical engineering solutions, serving a wide-range of heavy industries such as oil and gas, power generation, semiconductors and marine.

The company also specialises in engineering services that include coating, machining and grinding, manufacturing and precision cleaning.

The company today employs some 1,000 employees across its engineering plants in the Asia-Pacific such as Singapore, Malaysia, Thailand, the Philippines and Taiwan.

Over the last three years, Frontken has switched its focus from heavy oil and gas-related services to higher margin semiconductor services. This has resulted in its improving results.

For its first quarter to March 31, 2017, the company made a net profit of RM5.02mil from a previous loss of RM1.24mil in the same period of the previous year. Revenue increased to RM67.06mil from RM58.79mil previously.

The better results were due to improved performance by the group’s subsidiaries in Taiwan and Singapore, largely due to the positive growth of the semi-conductor business in the current quarter.

For the full financial year ended Dec 31, 2016, the company recorded net profit of RM20.04mil, which was a significant jump from its previous year’s profit of RM4mil. This was despite revenue reducing slightly to RM261.85mil from RM280.57mil previously.

Kenanga Research has issued a trading “buy” call on the stock with a target price of 43 sen. It is targeting net profit of RM26.9mil and RM31.8mil for FY17 and FY18 respectively, hinged on better growth from its Taiwanese subsidiary.

Frontken owns a 84.6% in Taiwan’s Ares Green Technology Corp, which is traded on the Taiwanese over-the-counter market. It has been increasing its stake in the company over the years.

Indeed, the bulk of Frontken’s profits are coming from Ares Green, which contributed operating profits of RM23.93mil or 72.3% of its total operating profits of RM33.11mil. Its Malaysian operation is the second largest contributor at RM7.2mil.

Ares Green is engaged in the precision cleaning, surface treatment and refurbishment of semiconductor and opto-electronic manufacturing equipment, as well as the development of semiconductor and opto-electronic components.

Ares Green has been growing significantly over the last few years, in part because Taiwan is the largest integrated circuit global wafer fab producer with a 21% global market share. The company operates its businesses in the Americas, Taiwan and the rest of Asia.

“Barriers to entry are high for the business. Ares Green cleans wafer fab equipment. They have to have all sorts of certification and customer trust before they can do the work,” says one analyst.

Meanwhile, Kenanga expects Frontken’s net cash to continue growing with the absence of major capital expenditure, going forward; with a likelihood of the group to conserve the cash for earnings accretive business investment.

“Our target price of 43 sen is based on a targeted 14.2 times FY18 price-to-earnings ratio which is the group’s three-year forward PER,” said Kenanga.

Should Frontken be able to deliver on its earnings, interest in the stock should prevail. Afterall, fundamentals and earnings matters most.

Frontken , stock , semiconductor