Wednesday, 19 October 2011

German Boost in Frontken?

Recently, a German called Jorg Helmut Hohnloser has been accumulating Frontken's shares, increasing his stake in the company from 5% to 5.21%, with about 2.2million shares acquired in July & August this year.

Who is this guy? He actually represents Hohnloser group, who is also the sole owner of Germany-based Cleanpart group, which is said to be one of the world leader in surface engineering and coating services for the semiconductor industry.

Originating in semiconductor sector, Cleanpart has evolved into an all-round engineering service provider for advanced submicron applications in the areas of chemical engineering, mechanical engineering, surface engineering and semiconductor process engineering. 

Frontken and Cleanpart seems to offer similar service, one in Asia-pacific and one in US/Europe. Will Hohnloser continue to increase its stake in Frontken to become a strategic partner, or even acquire the company?

Frontken is a real penny stock, even trading as low as 10sen early this month. Is Frontken really that "cheap"?

Lets look at Fronken's past financial performance:

RM mil Revenue Net Profit
2006 72 7.9
2007 105 3.6
2008 131 18.8
2009 137 8.1
2010 147 11.8

Please note that in 2007, Frontken's profit was negatively affected by fire and flood incident, which was compensated by insurance in 2008.

Frontken is said to be a leader in surface metamorphosis technology in Malaysia and Singapore region. It provides cleaning and engineering services to mainly oil & gas, power generation and electronic & semiconductor sectors. The positive point here is that the business seems to be growing, with yearly increase in revenue even though the globe was hit by recession in 2008-09. 

The EPS is only about 1 sen/share, perhaps this makes the stock not attractive. There are not many analysts covering the company I guess. However, Frontken starts to give away its first ever dividend last year (even though only 0.1sen per share) and the dividend payout continues this year.

In 2010, Fronken acquired another 8.1% in Taiwan-based Ares Green technology, who has 6 factories in the mainland China. Frontken now has 51% in Ares Green and it will be used as a vehicle to penetrate the huge China market.

Frontken may also benefit from the booming in solar energy investment in Malaysia. Earlier this year it was reported that Frontken stands a good chance to get the contract of equipment maintenance and surface cleaning for SunPower & Optronics solar cells fabrication plant in Malacca. The plant is expected to start operation only in 2013.

According to Frontken's MD, Frontken Philiipines is pre-qualified by Sun Power to do maintenance job in its solar power plant and Optronics Corp is Ares Green largest client in Taiwan. If Frontken successfully clinch the contract, it is estimated to contribute a recurring income of about RM20million annually to Frontken!

Nevertheless, Frontken's latest 2Q2011 results is rather disappointing. Though its RM46.7mil quarterly revenue is the second highest in history, it recorded a profit before tax of merely RM0.105mil and profit after tax RM0.35mil. The reasons for the poor margin should be the high operating expenses, depreciation and amortisation.

Its cash or equivalents stands at RM27.6mil after 2Q2011 compared to RM34.2mil on 31 Dec 2010. Its current borrowings reduces from RM22mil to RM17mil in the corresponding period while its long term debt stands at around RM49mil.

I am not sure how will Frontken perform in 3Q2011. Can the high operating cost drag it into red? If it is back on track, then it might have a bright future ahead. It is noteworthy that when its share price fell, Frontken bought back its own shares for the first time since being listed, with now 1.8mil shares in treasury. This move may hint that the company is very much undervalued and the management is confident of its future.

Frontken is now trading at 12sen, significantly cheaper than its NTA of 21sen. With a German and the company itself buying its shares, will you follow?

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