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UOBKH cuts Frencken TP by 21% on seasonal slowdown, tepid 4Q21 expected

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“We do not anticipate any surprises in the upcoming 4QFY2021 results for Frencken."

UOB Kay Hian Research analyst Clement Ho is “not expecting any surprises” in Frencken Group’s upcoming 4QFY2021 results, to be released in the last week of February.

While worldwide chip sales continue to be robust, the technology manufacturer should report slower q-o-q results owing to seasonality effects, adds Ho.

In a Jan 25 note, Ho is maintaining “buy” on Frencken with a trimmed target price of $2.06 from $2.62 previously. The updated target price represents a 23.4% upside.

“We do not anticipate any surprises in the upcoming 4QFY2021 results for Frencken. Our net profit estimate of $14 million (up 33.2% y-o-y, but down 5.4% q-o-q) is derived from revenue of $175 million, which implies a 7.6% y-o-y growth and an 11% q-o-q slowdown due to seasonality effects,” writes Ho.

For 9M2021, Frencken reported earnings of $46.1 million (up 43.7% y-o-y), taking net profit to 77% of Ho’s full-year estimate. “The strong performance was led primarily by the semiconductor segment, which helped drive positive operating leverage,” he adds.

As at 11M2021, global chip sales have grown 25.3% y-o-y to US$501.8 billion, and were on track to meet the estimate of US$553 billion in 2021, according to World Semiconductor Trade Statistics (WSTS).

Semiconductor market grows despite pandemic

The semiconductor market overall was not negatively impacted by the Covid-19 pandemic in 2021, with robust customer demand due to secular growth drivers including 5G, Internet of Things (IoT) and artificial intelligence.

For 2022, WSTS is projecting a growth rate of 8.8% to US$601 billion for the global semiconductor market.

Frencken’s semiconductor segment will remain the key growth driver in 2021 and 2022, writes Ho. “Specific to Frencken, we expect the relatively more profitable semiconductor segment to contribute 39% and 40% of revenue for 2021 and 2022, an increase from 30% in 2020. This should help lift overall gross profit margin from 17.0% in 2020 to our estimate of 17.4% in 2021 and 2022, driving net profit growth by 41% and 11.7% in 2021 and 2022 respectively due to positive operating leverage.”

Chip shortage good for Frencken

The ongoing chip shortage bodes well for Frencken’s key semiconductor customers, who are mainly in the business of manufacturing equipment to make semiconductor chips. Current indications and outlook of these customers are still pointing towards a continuation of the uptrend, which is likely to be sustained into 2022, says Ho.

Ho has reduced Frencken’s valuation peg from 16.7 times to 13.1 times FY2022F PE, from the initial 20% discount to key clients of Frencken to the stock’s historical 1 standard deviation PE range.

As reference, the new valuation peg translates to a 28% discount to Frencken’s key clients.

“A more conservative stance is taken amid expectations of higher interest rates moving forward, impacting growth stocks generally. Despite that, we are still of the view that the current PE valuation of 10.7 times for Frencken is attractive relative to peers due to its superior earnings growth profile, with earnings per share (EPS) compound annual growth rate (CAGR) estimated at 24% over 2020-2023,” writes Ho.

As at 11.44am, shares in Frencken are trading 2 cents lower, or 1.23% down, at $1.61.

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