3Q25: M&A's in focus
Management provided more clarity on potential M&A opportunities, with 3 deals being explored.
Stock information
FRONTKEN
FRONTKEN - MYX 0128
BUY
Target price: RM5.30
Last price: RM4.52
Market cap: RM7,305m
Shares out: 1,616m
52-week range: RM2.63 / RM4.83
3M ADV: RM23m
T12M returns: 24%
Disclaimer: By using this information, you acknowledge that you are solely responsible for evaluating the merits and risks of any investment decision and agree not to hold NewParadigm Research liable for any damages arising from such decisions.
Key points
- 3Q25 Adj NP of RM41.5m (+15% YoY, -21% QoQ) brought 9M25 Adj NP at RM127m (+26% YoY); in-line with expectations.
- Sequential deceleration was due to falling margins, held back by some frontloaded costs ahead of capacity expansion.
- Maintain BUY with TP of RM5.30 - underlying volumes from key front-end customers remains robust in 2026 on AI demand.
Share price performance
Investment fundamentals
| RMm | FY24A | FY25E | FY26E | FY27E |
|---|---|---|---|---|
| Revenue | 569.2 | 644.9 | 780.5 | 913.1 |
| Revenue Growth | 14% | 13% | 21% | 17% |
| EBITDA | 212.5 | 281.7 | 338.8 | 396.7 |
| EBITDA margin | 37% | 44% | 43% | 43% |
| PATAMI | 136.8 | 187.5 | 228 | 269.4 |
| PATAMI margin | 24% | 29% | 29% | 30% |
| ROA | 14% | 17% | 17% | 18% |
| ROE | 18% | 21% | 22% | 22% |
| PER | 52.0 | 37.9 | 31.2 | 26.4 |
| P/BV | 9.2 | 7.9 | 6.8 | 5.8 |
| Yield | 1% | 1% | 1% | 2% |
Source: Bloomberg, NewParadigm Research, November 2025
M&J and JV opportunities in focus
- Earnings momentum stalled on higher costs and normalizing margins, coupled with ongoing tepid performance in the O&G segment. Not representative of margins going forward.
- Part of the cost escalation was pinned on the migration of TFT/LCD cleaning lines from Plant 1 to Plant 3, to free up Plant 1 for more advanced semiconductor lines. The move is complicated by the need to minimize capacity disruption to customers through the move and will be completed in 1H26.
- On new nodes, management indicated a new cleaning line for leading-edge tooling is in the process of installation and qualification in Plant 2.
- Management provided more clarity on potential M&A opportunities, with 3 deals being explored. The most actionable deal might see a landing on valuations with the seller within the next month before proceeding to due diligence, for a potential close in 2026. This deal is in the scale of “hundreds of millions of ringgit” according to management, which is well within Fronken’s RM567m cash reserves to digest. Critically, the acquisition would be immediately earnings accretive with similar margins.
- More details on the potential M&A/JV plans below.
Upside from inorganic growth
- Acquisitions, pending details could be a catalyst to expand earnings base in FY26, on top of our forecast ~22% organic earnings growth.
- Maintain BUY with target price of RM5.30 on 35x FY26 PER.
About the company
Providing precision cleaning services to leading-edge foundries in Taiwan, where it derives almost 70% of revenues and over 80% of operating profits. It is a relatively high margin business. FRCB’s key customers includes TSMC, and both stocks have historically enjoyed a reliable correlation in earnings. FRCB also runs a non-core O&G business which includes maintenance, repair and overhaul of industrial equipment. FRCB boasts a strong track-record in retaining market share with its customer as well as securing qualification for new nodes.
About the stock
Frontken is among the top 3 largest companies by market cap within the semiconductor sector in Malaysia. It is seen as the best proxy to front-end semiconductors (fabs), as most of its peers are back-end packaging OSAT’s and/or equipment makers (capital goods) for the sector. The stock is well-institutionalized with EPF holding almost 10% of the stock. On the other side of the coin, the stock is tightly held by institutions and is relatively illiquid. In turn, Frontken trades on premium valuations of >30x PER - even higher than TSMC's high teens PER.
Investment thesis
Frontken is the best domestic exposure to semiconductor front-end in Malaysia. It boasts more stable and persistent secular drivers, due to its leverage to leading edge processes and customer stickiness. It is also more defensive through the cycle compared with OSAT peers and not exposed to dollar weakness. Frontken's premium valuations is also further justified by the option to match TSMC's capcity expansion into new regions as well as potential to montize intellectual property.
Key risks
- High customer concentration risk. While the probability is very low, any
operational mistakes/lapses that result in the loss of confidence by the
customer poses steep financial risk to FRCB. - High expectations for earnings delivery - having been consistently profitable since 2016. We anticipate there could be strong negative share price reaction if there is a significant miss to earnings and/or steep downgrade in guidance.
- Geopolitical risk: Frontken is highly exposed to the broader Taiwanese front-end semiconductor ecosystem. Any structural shocks to the industry would pose significant downside risk to both profitability and valuations.
Revenue by segment
3Q25 earnings snapshot
M&A and JV potential
Deal 1: A "small-ish" acquisition
- A US-based company that supplies a product needed for dry clean processes in the semiconductor sector. A key product being supplied could be used to extend mean time between cleaning cycles for tooling. Currently they share mutual end-customers.
- Estimated acquisition value is “hundreds of millions of ringgit” and valuation range in the mid-teens (EV/EBITDA). The acquisition target has a margin similar to Frontken, and would offer a potential base in the US.
- This is the most advanced deal, we infer, with potential to close in 2026 and
contribute to earnings.
Deal 2: A joint-venture opportunitiy
- A US-based company, that does cleaning services. Focus is to joint venture to support the Taiwanese customer in the US, with potential opportunities to partner and support other customers globally.
- Aim is to joint venture, limiting out of pocket investment from Frontken, which will be providing the process know-how and qualification from the Taiwanese customer.
- Current volumes of Taiwanese customer in the US do not warrant a facility, with critical mass estimated to justify a plant only in 2028 onwards.
Deal 3: A "big one"
- Limited information on this opportunity, but management guides it is larger than RM1bn.
- May require further fund-raising to support this deal, especially if Deal 1 also
proceeds.
