Maybank Research ups Frontken’s earnings forecast, retains buy call

KUALA LUMPUR: Maybank Investment Bank Research raised Frontken’s Taiwan revenue estimate by 3%-13% to RM203mil to RM272mil for FY18E-20E. 

In its research note on Tuesday, it expects better contribution from its Singapore semiconductor segment of RM76.7mil in FY20E on more work orders due to significant memory chips production at its major customer’s new fabrication plant there. 

“As such, these increase our earnings forecasts by 12%/16%/5% in FY18E/19E/20E,” it said.

Maybank Research said the recent retracement in Frontken’s share price provides buying opportunity. 

“We raise our earnings forecast by 5%-16% for FY18E-20E on more high value work orders, riding on positive demand for Customer X’s 7nm chips. 

“Hence, our TP is raised to RM1.01 (from 69 sen), pegged to higher price-to-earnings ratio (PER) of 18.8 times FY19 EPS (one standard deviation above its five-year mean) (previously 15 times at 0.5 SD), supported by higher three-year (FY17-20E) earnings CAGR forecast of 25% (previously 17%),” it said.

Maybank Research expects Frontken to be busy with more precision cleaning works in 2HFY18 and FY19, with the production ramp-up of its Customer X’s 7nm chips in Taiwan. 

Customer X is currently the only foundry offering this advanced process, which should put it at the forefront in the global semiconductor market for the production of high-performance electronic chips. 

“We also think Customer X will continue to dominate the market with the lion’s share in CY19-20 although Samsung is expected to start production of 7nm chips in 2HCY19 due to its first-mover advantage,” it said.

The research house expects Customer X to increase its 7nm wafer shipment to approximately one million units in FY19E from 0.4m units (for a six-month period) in FY18E. 

“We expect the volume will be mostly for Apple (about 400,000 units), Qualcomm (about 150,000 to 200,000) and Huawei (about 120,000 to 150,000). We also expect AMD to use Customer X’s 7nm chips (about 100,000) exclusively for the production of its new GPU (Vega) and CPU (Rome) products in 4Q18 and 2Q19 respectively. 

“We think Customer X has benefited from AMD’s preferred partner for CPU, Global Foundries’ decision to end 7nm development due to financial concerns. AMD currently uses Customer X’s 28nm/16nm for its gaming APU,”  it said.