The good run continues; maintain BUY
FRCB posted another set of strong results in 1Q22, buttressed by record turnover and EBIT margins at its Taiwanese operations. Adopting a more conservative approach in an inflationary environment, we have lowered our valuation peg to 38x FY23E PER, at +0.5SD to the LT mean (from 44x FY23 PER, at +1SD). Our revised TP is now MYR3.55 (-13%), but our BUY call/forecasts are maintained, premised on FRCB’s resilient demand and market-leading position as a niche SP to the largest wafer foundry globally.
Results within expectations
Excluding EIs of MYR0.9m, FRCB’s 1Q22 core net profit came in at MYR25.6m (+14% YoY, -14% QoQ). Results were within expectations at 20% of our/the street’s full-year estimates as 1Q is historically the weakest quarter. Group turnover was up 15% YoY, largely due to improved contributions (+21% YoY) from its 93%-owned Taiwanese subsidiary (AGTC), that continues to benefit from the robust demand for its key customer’s industry-leading advanced node (<5nm) chips amidst the ongoing upcycle.
Taiwanese segmental margins hit an all-time high
Other key result takeaways: (i) EBIT margins remained elevated at 34%, underpinned by strong operational leverage at its Taiwanese ops (AGTC contributed c.86% to group EBIT with margins at a historical high of 41%); (ii) revenue for MY also grew 10% YoY from new workflow orders awarded
as part of PG’s umbrella contracts, in-line with higher oil prices; but (iii) segmental EBIT margins for MY/SG however dragged -8ppts/-5ppts YoY due to acute billing time lags, Covid-related worker shortages, and absence of wage relief subsides in the previous year corresponding quarter; we opine
that affected margins are likely to normalise in sequential quarters.
Rising-rate environment = moderated valuation peg
With Phase 1 of FRCB’s new plant in Kaohsiung set to be operational in 2H22, coupled with its key customer’s (TSMC) forward guidance of achieving record gross margins of 56%-58% in 2Q22, we continue to remain upbeat on FRCB’s prospects as a direct proxy to the ongoing mega-foundry super cycle. While our previous valuation peg of 44x FY23 PER (+1SD to LT mean) reflected this robust outlook, we now adopt a more conservative approach towards sector valuation premiums given the suppressive effect
of aggressive Fed tightening by moderating our valuation peg to 38x FY23 PER (+0.5SD to LT Mean). Earnings forecasts, BUY rating are maintained.