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Frencken gets a 'buy' amid expectations of a positive year; analysts lower target price on possibility of slower growth

CGS-CIMB's Tng, DBS’ Ling and RHB’s Seet have posted “buy” and “add” calls on Frenken, at lower price targets

Analysts have taken a strong liking for Frencken Group following its results for FY2021 ended Dec 31 2021.

The manufacturer’s full-year earnings grew by 38% to $58.7 million, on the back of 23.6% increase in revenue to $767.1 million.

“This was in line with our expectations [and is] at 102% of our full-year forecast and above Bloomberg consensus expectations at 106%” CGS-CIMB analyst William Tng writes in a research note.

Conversely, DBS Group Research analyst Ling Lee Keng says that the company’s latest set of results fell short of her expectations due to weaker margins.

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For one, gross profit margin had eased to 16.8% in Y2021, from 17.0% in FY2020. While margins were a tad weaker across all segments, the automotive sector was hit the hardest.

Even so, she says the company’s latest set of results are “strong” and come despite disruptions to supply chains brought on by the movement restrictions to curb the spread of the coronavirus.

The semiconductor sector – which started to be on an uptrend in 2HFY2019 - remained the key contributor in FY2021, following her orders for both front-end and back-end semiconductor equipment from customers in Europe and Asia.

The sector is expected to continue “being robust” since global companies are still spending heavily on capex and the chip shortage is still ongoing, RHB analyst Jarick Seet writes in a Mar 3 note.

“Strong demand from this sector should continue to benefit Frencken positively until 1H22F, before softening in 2HFY22,” he adds.

Agreeing, Ling says the sector is likely to have a slight dip in 2023, before continuing on its growth trajectory in 2023.

In the longer-term, she notes that Frencken will benefit from the growth of the semiconductor industry at a CAGR (compound average growth rate) of 85 between 2020 and 2025.

Meanwhile, Frencken’s management has also guided that the industrial automation and automotive segments are likely to see y-o-y growth in FY2022 ending on Dec 31.

For reference, revenue from the industrial automation segment had softened by 11.9% to $104.7 million due to lower capital expenditure for hard disk production equipment by a key consumer.

Sales in this segment are typically lumpy in nature and the speed and magnitude of sales growth is hinges heavily on the capital expenditure of the key customer, says Seet.

In this time, the automotive sector saw 6.6% y-o-y growth in FY2021. The segment is expected to benefit from more programmes on the back of the V2X or vehicle-to-everything trend, observes DBS’ Ling.

Seet adds that the segment should continue seeing a recovery amid expectations of an easing in the global chip shortage throughout the year.

Overall, Ling notes that all sectors that Frencken operates – including medical and analytical & life sciences – are slated to register “at least stable revenue in 1HFY22 vs 2HFY21”.

“The semiconductor, industrial automation and automotive divisions are expected to record higher revenues in 1HFY2022 vs 2HFY2021; medical and analytical & life sciences are anticipated to record stable revenue,” she adds.

Additionally, opportunities also come as Frencken ramps up its output capabilities and takes up more production facilities in Europe, Malaysia and Singapore.

The company has also been looking to expand its wallet share with customers, especially through its acquisition of Avimac in September 2021.

With this, the mechatronics division now has more production capacity and capabilities to provide new technologies and competencies and support new programmes launched by customers, says CGS-CIMB’s Tng.

To this end, Tng, DBS’ Ling and RHB’s Seet have posted “buy” and “add” calls on Frenken, at lower price targets.

Tng – whose target price is down a cent to $2.06 – says the revised call will give the counter a 26.4% upside from its $1.63 price as at Feb 28.

Similarly, Ling believes her $2.09 call will give the counter a 31% upside. Her target price is pegged to a lower peers’ average of 13.5x (from 15.5x previously) on FY22F earnings, due to the de-rating of tech stocks globally.

Similarly, Seet says his target price of $2.10 is pegged to a lower P/E of 14x FY2022 earnings, compared to 16x P/E previously.

“We believe FY2022 will be a positive year for Frencken, as it will likely continue to post steady growth in FY22. However, growth will likely slow down y-o-y,” he explains.

“We are also positive over its long-term prospects and able management team, which justifies our ‘buy’ call,” adds Seet.

Shares in Frencken closed flat at $1.62 on Mar 3.

Cover image: file photo

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