Analysts at Maybank Securities and UOB Kay Hian (UOBKH) have both kept their “buy” calls on Frencken Group E28 at unchanged target prices of $1.77 and $1.74 respectively following its 1HFY2024 ended June results.
Meanwhile, the analyst at DBS Group Research has likewise kept her “buy” call, albeit at a lowered target price of $1.77 from $1.90 previously.
Maybank’s Jarrick Seet notes that the group’s 1HFY2024 profit after tax and minority interests (patmi) of $18.1 million was in-line with his and consensus estimates.
In 2HFY2024, Frencken expects higher group revenue and higher revenue contribution from its higher-margin yield semiconductor segment, which Seet notes is positive due to the increased gross margin of 14.8% in 1HFY2024 from 12.3% a year ago.
The analyst adds that orders estimated around $20 million to $80 million from a key semiconductor customer will boost margins in the second half, following a delay into 3QFY2024 from the previous quarter.
He writes in his Aug 16 report: “As a result, we expect profitability to be stronger in 2HFY2024 versus 1HFY2024. As both of its local peers reported disappointing results, we believe Frencken is the best proxy of recovery of the semiconductor industry and it remains our top pick in the Singapore tech sector.”
Seet also notes that Frencken’s key strategic position as a manufacturer with a large presence in Europe and Southeast Asia allows it to benefit from orders by these key customers in the next few years.
“We think there is a huge potential to grow significantly with its largest semicon customers from FY2025 to FY2027, especially with the worsening trade relations between the US and China.”
He concludes: “While the majority of its local peers are suffering significant decline in net profit after tax (NPAT), Frencken’s NPAT is slated to grow strongly in the next few years.”
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Upside factors noted by Seet include stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products as well as improving efficiencies improving institutional interest, which could help the stock re-rate towards peers’ valuations.
Conversely, downsides include a drop in demand, supply chain disruptions that impede Frencken’s production ability and revenue recognition, and a lower-than-expected dividend pay-out.
Meanwhile, UOBKH’s John Cheong notes that Frencken’s earnings for the period were in-line, forming 41% of his FY2024 estimate.
“Frencken has continued strong new product introduction and first article engagement with key customers under the oneMechatronics programme, which is a site-transferring programme that spans the semiconductor, analytical/life sciences, medical and aerospace segments and across operating sites
Share price catalysts noted by the analyst include higher-than-expected factory utilisation rates and better cost management.
On the other hand, although DBS’ Lee Keng Ling is also pleased with the group’s results, she notes that Frencken’s capacity is still not at its optimal level.
On this she writes: “However, the group still has enough capacity to cater to the increasing demand as of now, thanks to the recent expansion plans (particularly in Malaysia) that the group has embarked on.”
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Ling has hence trimmed her earnings projections for FY2024 and FY2025 by 8% each, but she continues to expect margin recovery to be sustainable.
The DBS analyst notes a broad global economic slowdown which could impact demand and earnings as a key risk.
As at 2.22 pm, shares in Frencken are trading 4 cents lower or 2.86% at $1.36.
