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UOB Kay Hian upgrades Frencken to 'buy' due to 'positive outlook' for its key customer and improving cost pressures

UOB Kay Hian's John Cheong has increased his target price to $1.36 from $1.07 previously.

UOB Kay Hian analyst John Cheong has upgraded his call on Frencken Group to “buy” with a higher target price estimate to $1.36 from $1.07 previously. The new target price is pegged to an FY2023 P/E of 10.2x, based on Frencken's mean P/E. This is raised from his previous FY2023 P/E peg of 8x, based on -1 standard deviation (s.d.) of Frencken’s mean P/E previously.

To Cheong, the upgrade comes as the group’s major customer, ASML, reported an earnings growth of 28% y-o-y for the 4QFY2022, which came higher than expected. The earnings beat came as the group was said to be still struggling to meet demands from its top customers, TSMC, Samsung and Intel.


“ASML highlighted that its order backlog has increased to a record €40 billion ($57.1 billion) as of 2022 and guided for a rise of more than 25% in 2023 sales despite possible new curbs on its exports to China,” writes Cheong in his Jan 27 report.

“ASML’s CEO highlighted that although the economic outlook for 2023 is clouded by worries over the economy and growing semiconductor inventories, customers also see conditions improving toward the end of the year and China's economy recovering after the end of Covid-19 curbs. As a result, the demand is still higher than what ASML can make,

“Based on the huge order backlog and positive sales growth guidance of ASML, Frencken should benefit from improved order flows from ASML as it contributed around 30% of Frencken’s revenue in 1HFY2022,” he adds.

In addition, Cheong sees the falling prices of natural gas in Europe as a plus as it should reduce the group’s energy expenses. The group’s gross profit margin (GPM) fell by 3.4 percentage points y-o-y to 13.7% in the 3QFY2022 on the back of soaring energy expenses and manpower costs.

“The Dutch TTF Natural Gas Future has fallen by close to 50% mom and by around 15% year-to-date (ytd) as Europe has managed to make it through winter so far without severe energy shortages, thanks to above-normal temperatures, ample supplies and reduced consumption,” says Cheong.

“This bodes well for Frencken as close to 40% of its revenue was derived from Europe in 1HFY2022, with majority from The Netherlands,” he adds.

Ahead of its results for the 2HFY2022 and FY2022, Cheong expects the group’s results for the six-month period to be stable on a h-o-h basis, based on Frencken’s guidance issued in its 3QFY2022 business update.

The group also expects its cost-sharing efforts with customers in Europe to yield “positive effects” from 4QFY2022 onwards. The group also guided that its semiconductor segment is expected to remain stable in the 2HFY2022, while its medical and automobile segments look set to improve on a h-o-h basis. Meanwhile, its analytical & life science segment is expected to come in “slightly lower” while its industrial automation is expected to fall on a h-o-h basis.

Cheong’s increased target price reflects “the improved outlook from its key customer and reducing energy costs of its key market”.

“We note that Frencken has a diverse stream of revenue sources, which could help the company stand firm amid a volatile macro environment,” he says.

Shares in Frencken closed 1 cent lower or 0.87% down at $1.14 on Jan 26.

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