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CGS-CIMB maintains ‘add’ rating on Frencken, but trims target price

·2-min read

The company's margin pressures are forecast to ease in the second half of 2022.

CGS-CIMB’s William Tng has maintained his “add” rating on Frencken Group, although he has cut his target price on the stock to $1.72 from $1.77.

In a July 4 note, Tng points out that in its 1QFY2022 ended March, Frencken’s gross profit margin and net profit margin stood at 15.4% and 6.5% respectively, compared to 17.2% and  8.1% in 1QFY2021.

This was mainly due to higher raw material prices, higher costs incurred to mitigate supply chain disruptions, and higher operating costs from inflation. As such, he expects the margin pressure to continue into 2QFY2022, before improving in 2HFY2022.

Frencken’s management has guided that new orders from customers will reflect the current cost environment, and its internal efforts to lower operating expenses will also help defend and improve margins in 2HFY2022.

In addition, Tng thinks the backlog arising from supply chain disruptions in 1HFY2022 could help 2HFY2022 performance in Frencken’s automotive segment as production resumes momentum.

In the semiconductor segment, he sees “good growth prospects” for Frencken, with the segment making up 38% of its 1QFY2022 revenue.

Meanwhile, Frencken has expanded its cleanroom facilities in Europe, Malaysia, Singapore, and the US, while new and larger premises in the Netherlands, Malaysia, and Singapore are expected by management to be completed in 1HFY2022.

The company also commented it has moved up the value chain to do higher level module assembly to an entire chamber for its customer’s end products.

Separately, Tng notes that Frencken had a net cash position of $72.8 million at end-March, and says “in a recessionary environment, we think Frencken could keep a look out for complementary mergers and acquisitions (M&As).”

Previously, Frencken acquired Singapore-incorporated high precision machining parts supplier Avimac in September 2021 for $14 million and in Jan 2022, Malaysia-incorporated polychem company Penchem Technologies.

Despite the optimistic assessment of Frencken going forward, Tng also warns of downside risks, like potential production disruptions arising from Covid-19 infections in its workforce and
further cost pressures from higher raw material costs.

As of 2.59, shares of Frencken were trading at $1.09, with a FY2022 P/B ratio of 1.13 and dividend yield of 3.55%.

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