Frontken: Profit Guarantee In TTES Acquisition

In my last post, I wrote about Frontken mainly because one blog reader asked for my opinion on it.

I must admit that I didn't study the company in detail. I am too busy with work lately, feeling a bit frustrated and thus, have not much time and mood in stock market.

As stated in my previous post, I always think that Frontken is a good stock even though I lost track with it since mid-2013. I missed the news of its Tanjung Bin contract.

I did hesitate whether to invest in Frontken in early 2015, when the stock was made popular by fellow contributors in i3investor.

I studied it briefly and finally, the lack of major contract after Tanjung Bin and the gloomy O&G industry caused me to shy away from it.

However, I missed one important information, which is the profit guarantee in the acquisition of 45% in TTES which was acquired in May 2014.

I wish to apologize to readers about this mistake, and feel obliged to write another article to correct it.

The rest of the story is, I missed the opportunity to make a good profit in a short time.

About the profit guarantee, it is stated in the SPA that the cumulative audited PAT of TTES for the financial years ending 31 Dec 2014 and 2015 shall not be less than RM8mil. If not, the vendor shall compensate Frontken for the shortfall.

Since Frontken holds 45% of TTES, then Frontken should get at least RM3.6mil net profit. Who knows TTES can deliver more than RM8mil in that period of time?

TTES's PAT shows CAGR of 88.5% from 2011 to 2013, though PAT in 2013 was just RM1.02mil.

As the vendor is so confident to give such profit guarantee, I think there must be some big contracts on-going and pending.

The acquisition by Frontken was just completed on 23 May 2014. Does it mean that Frontken will not get the profit before 23 May in 2014?

If this is the case, the amount should be very small anyway.

Even though crude oil price tumbled soon after the acquisition, and Petronas capex is reduced, Frontken will still bag the profit guarantee. 

In general, Frontken seems to be a growing company since taken over by a German.

Taiwan's Ares Green is expanding. Even if TTES does not do well in 2015, it certainly will when the O&G industry rebound.

With ample cash, Frontken might acquire another assets or business in the future.

Who knows another big contract is on the way?

So, I think shareholders of Frontken need not worry too much about its long-term prospect.

On whether it is the right time to buy its shares, it depends on your own judgement and confidence.

Frontken: Will It Get Better in 2015?

I first invested (or speculated) in Frontken in 2009, and subscribed to its rights issue with free warrants in 2010.

This stock swung between profit and loss and somehow I manage to sell all the shares and warrants in early 2011 for some gain.

I still kept a very close eye on Frontken after that as super penny stocks around 10-20sen were my favourite.

When Frontken's share price tumbled to around 6sen in year 2013, I still felt that it was a good penny stock with great potential. I planned to speculate on it again when the time was right.

Unfortunately, I lost track with Frontken after I changed my investment strategy in mid-2013. I didn't follow Frontken close enough, and so I missed its share price rally since last year.

Without shadow of a doubt, year 2014 was a magnificent year for Frontken. 

Its revenue reached a record high of RM309.8mil which is 63% better than FY13. It has reversed its loss of RM2.3mil in FY13 to a PATAMI of RM18.8mil in FY14.

What a turnaround.

Its cash flow is good and it has repaid most of its bank borrowings and becomes a net cash company now.

Why does Frontken perform so well in FY2014? Will it continue to do well in 2015?

Lets check its revenue contribution in 2014.

Looking at Frontken's segmental revenue, there is no doubt that Oil & Gas and Semiconductor industries contributed massively in 2014.

Through 57.9%-owned subsidiary company Ares Green Technology (Taiwan), Frontken is able to enjoy the robust growth in the semiconductor sector in Taiwan.

While contribution from Taiwan has increased 50% YoY in 2014, the main contributor is actually from Oil & Gas sector in Malaysia, in which its revenue increased from RM18mil to RM131mil YoY.

In September 2013, Frontken was awarded a contract by ATT Tanjung Bin Sdn Bhd as the main contractor for a hydrocarbon storage and distribution facility at Tanjung Bin.

The contract is worth RM110.6mil and the proposed date of completion of the project is 11 April 2015.

This means that after the Tanjung Bin project has been completed, its O&G annual revenue will likely to shrink significantly especially when there is a slow down in O&G sector now.

While Taiwan's Ares Green is enjoying superb growth in 2014, there is a disturbing slow down in Q1 of 2015 if compared to Q4 of 2014.

The chart below shows monthly revenue of Ares Green (blue bars) & YoY change (red line).

       Ares Green Tech monthly revenue

Though monthly revenue in year 2015 has reduced significantly, fortunately they are still higher compared to previous year's corresponding periods.

However, if there is no "revenue spike" in Q4 of 2015, then Frontken's revenue from Taiwan in 2015 may not show significant growth.

Last year Frontken has acquired 45% stake in TTES Team & Specialist Sdn Bhd which has expertise in turbo machinery and rotating equipment engineering, technology, maintenance and technical support services.

TTES's customers are mainly in the O&G field. Its PAT in 2013 is merely RM1mil and is unlikely to contribute significantly to Frontken in the near future.

In conclusion, Frontken is a good company, but I think its FY15's financial result is unlikely to beat FY14 unless it secured another fat contract like the Tanjung Bin contract this year.

Dark Horses Gallop

Last Friday there was an article in Sin Chew Finance regarding stock pick in the Year of Horse.

The author listed 4 heavyweight Champion horses & 4 dark horses for Year 2014.

The 4 heavyweight horses, Tenaga, SKPetro, Armada & Gamuda are perhaps all too "heavy". They only advance about 0.5% yesterday.

Whereas the 4 dark horses which are N2N, Xinquan, Frontken & Keladi, gallop to the sky.

N2N rises 14%, Xinquan 14.6%, Frontken 17.6%, and Keladi jumps 28%.

It is no coincidence right?

This is the power of newspaper.

The author should have made a handsome profit.

Among all 4 dark horses, after a brief look into their historical revenue and profit, only N2N appears more appealing to me. However, current price at 65sen seems too inflated.

       N2N

Xinquan is cash rich, with net cash per share of RM1.64, much higher than its share price of 90sen last week. However, it is a China-based a.k.a. risky stock. Furthermore, sales are dropping at the moment, which is not a good sign at all.

       Xinquan

Frontken looks like a "quality" company traded below 10sen. However, its founder who is also top executive left the company and sold all his shares to a German in Jan 2012. Recent financial results show that it may take quite some time to post consistent profit. Persistent growth is not easy.

       Frontken

Keladi is cash rich and has huge land (515 + 667 acres ++) in Kulim not re-evaluated since 1996. This is more or less similar to Asas Dunia and many other high NTA developers. However, Kulim is not a hot spot for property. Though it can make continuous profit but it might not have good growth. It might be slow in turning the empty plantation land into property and profit. I can't even find its website.

       Keladi

So, how far can these dark horses go?

Frontken in Deutschland

Again, Hohnloser bought Frontken shares. This time he is no loser, he went BIG.

On 25 Oct 2011, Frontken's chairman and managing director Wong Hua Choon disposed 119,750,000 Frontken's shares, trimming his stake substantially from 23.5% to 11.7%. Two days later, Jorg Helmut Hohnloser acquired all those shares which increases its shareholding from 5.2% to 17.1%.

So, currently Hohnloser has become the no.1 shareholder in Frontken.

      Frontken's Global presence

Today in the morning session, Frontken's share price does not fly high. It is battled down 0.5sen at afternoon break. It seems like there is some activity of planned selling in stages. Nevertheless, Frontken's share has gained a hefty 35% in less than a month since bottoming out from its low of 10sen in 3rd Oct 2011.

Why do Wong, who is also the founder of Frontken, choose to give up his pole position in Frontken's shareholding?

Frontken was awarded by THE BRANDLAUREATE for ASIA PACIFIC's Best Brands in the category of Corporate Branding - Engineering in 2010-2011.

Frost & Sullivan 2010 Best Practices Award. South East Asia Technology Innovation Award - Semiconductor Services Market.

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?

Solar Power: The Next Big Thing?

Everyone is going "green" now. "Environment-friendly" products will definitely rule the market in the future.

How about green energy? I think solar energy could be a next big thing in Malaysia. Malaysia is situated along the sun belt and the sun light is free! It can come to a time that every new houses built in the future will come with a solar power system on the roof! At present it is still difficult as the solar power is very expensive. However, when it becomes more popular and the production is greatly increased, it can become much more affordable.

    Solar power system

There are signs to show this. The global solar power market is expected to grow from USD350bil in 2009 to USD2,900bil in 2020. It is estimated that in 2020, Malaysia will be the second largest manufacturers of solar power related products with a market share of 17%, just behind China.

Currently there are 4 large multinational solar companies that have decided to set up their plants in Malaysia. Q cells & First Solar already started operation in Klang valley & Kulim Hi-Tech park respectively. Sun Power/AU Optronics's plant is under construction in Melaka and is expected to be completed in 2013. Bosch just announced that it will set up its 80-acres plant in Batu Kawan, Penang before the end of this year.

There is one local listed company that plans to start the solar phtovoltaic cells manufacturing business next year. Tek Seng Holdings Bhd is a company that produce PVC or plastic related products such as toys, raincoats, curtains, table cloth etc and has little to do with solar power. However, Tek Seng decided to venture into this new business of solar cells manufacturing, with the technical help from a German company Schmid. A good diversification I guess.

Here are some important points from the news in The Star.

GEORGE TOWN: Tek Seng Holdings Bhd will invest RM596mil over the next five years in solar photovoltaic (PV) cell manufacturing business, which is expected to start operations next year.

Group executive chairman Loh Kok Beng told StarBiz that the company was now building a RM94mil plant in Bukit Minyak Science Park.

“We will start production with one line for 60MW solar PV cells in the first quarter of 2012. Our plan is to gradually increase the production lines to eight by 2016.

“In 2013, we will add one more line. We will add two production lines each year in 2014, 2015, and 2016,” he said.

A new subsidiary, TS SolarTech Sdn Bhd, has been set up to undertake the new business. Tek Seng has a 60% stake in the new unit.

Tek Seng is getting its solar PV cell technological know-how from Schmid, a leading German solar power company.

Loh said the group had started negotiating for sales orders with multinational companies in China.

“TS SolarTech expects to generate RM130mil to RM170mil revenue in 2012. This means that the new business is expected to generate over 70% of the group's revenue for that year.

“About 50% of TS SolarTech's business will come from overseas while the remainder from domestic martket,” he said.

    The future is as bright as the sun?

Take a look at Tek Seng's financial results, we can see that it generated a revenue of RM168mil in year 2010, which is a record-breaking year. When the solar PV cells business kick start with only one production line in 2012, the expected revenue from this new business should be RM130-170mil if we believe what its management says. What if more lines are added later?

Another company that I know which may benefit from the solar power industry is Frontken, which is a company involved in equipment maintenance & precision cleaning business. Earlier Frontken claims that it is optimistic to get the job from Sun Power plant in Melaka which is still under construction. If successful, it can generate an annual recurring income of over RM20mil to Frontken. Just check Frontken's earning to see what this figure means to Frontken. Personally I think Frontken is a good "penny stock" at just RM0.15/share with a good potential to grow.

Any other company that can reap benefit directly or indirectly from the solar power industry boom? Please share if got any.