Analysts are mixed on Frencken Group’s (Frencken) outlook following the release of its 1HFY2022 results.
CGS-CIMB Research’s William Tng and UOB Kay Hian’s John Cheong maintained their “add” and “buy” calls respectively, with Tng raising his target price (TP) slightly to $1.75 from $1.72 and Cheong lowering his to $1.60 from $1.63.
Meanwhile, DBS Research maintained its “hold” call for Frencken with an unchanged TP of $1.36 while RHB Group Research’s Jarick Seet downgraded his call to “neutral” from “buy” with a TP of $1.24.
Frencken’s 1HFY2022 revenue rose 3.6% year-on-year (y-o-y) to $389 million, with its mechatronics division revenue, representing 87.3% of 1HFY2022 revenue, growing 6.2% y-o-y and offsetting the automotive division, making up 12.5% of 1HFY2022, that saw a 11.5% yoy revenue decline.
CGS-CIMB’s Tng, whose TP of $1.75 is based on a 11.4x FY2023 P/E, says that these results were “in line” with expectations, with Frencken’s 1HFY2022 revenue forming 97% of his $402 million forecast and 46% of his and Bloomberg’s consensus full-year forecasts.
Frencken’s gross profit margin fell 1.79% points y-o-y and 0.58% points half-on-half (h-o-h) to 15.63% in 1HFY2022, which Tng attributes to inflationary cost pressures and “additional depreciation expenses” as the group made capital investments to upgrade its machinery and expand capacity globally.
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Cheong of UOB Kay Hian believes that Frencken has “witnessed success” in its efforts to mitigate inflationary cost pressures through these operational initiatives and expects these cost pressures to “ease” in 2HFY2022 with Frencken passing on increased input costs to customers from the 2HFY2022.
He expects Frencken’s h-o-h revenue to be “sequentially better” for the next half, with growth in the semiconductor, medical, analytical & life sciences and automotive segments, although the industrial automation segment is anticipated to register lower revenue, which has continued to be impacted by constrained customer demand as a result of bottlenecks in the global supply chain.
Cheong has reduced his 2022, 2023 and 2024 earnings forecast by 16%, 17% and 21% after reducing his revenue estimates to reflect lower demand across all the sectors due to slower global economic growth. “Also, we lower our gross margin assumption to 16.1%, 16.1% and 16.2%, down from 17.4%, 17.4% and 17.4%, to factor in supply chain disruptions, inflationary pressures due to rising raw materials, labour, freight and energy prices, as well as workforce disruptions in China,” he adds.
Although DBS believes that supply chain disruptions will improve moving forward, higher costs remain a “drag” on Frencken’s bottomline even as the company works towards mitigating cost inflation. “Costs are expected to remain high in the near term as the group continues to create new pillars for growth with the recent acquisitions of Avimac and Penchem, expansion of facilities in Europe, Malaysia and Singapore with large format machining and cleanroom assembly space, and the expansion of its workforce, paving the way for future growth,” it writes.
DBS has not changed its forecasts given “inline” 1HFY2022 results, representing 47% and 49% of revenue and net profit for its full year forecasts respectively, and “within” expectations as the second half is typically stronger, says DBS.
“We will turn more positive when margins show signs of improvement,” the DBS team writes.
DBS’s TP of $1.36 is pegged to Frencken’s peers’ average of 11x on FY2022 forecasted earnings.
RHB’s Seet, however, believes that Frencken’s outlook is “somewhat lacklustre”, basing his downgraded call on the fact that the stock’s price is close to his TP. “There should be more clarity on its expansion plan by end-3QFY2022 or in 4QFY2022 — and, in the meantime, investors can focus on other stocks in the same sector to yield more returns,” says Seet, who expects revenue growth to remain “muted” for the rest of the FY, with many of Frencken’s new projects likely only ramping up after new facilities are ready and qualified.
“That said, we remain confident in management’s ability to enable Frencken to perform better once its expansion plans are completed, and FY2022 should just be a temporary blip in its long-term outlook,” he adds. His key risks include a rise in material and overhead costs, and a downturn in semiconductor demand.
For CGS-CIMB’s Tng, downside risks are potential production disruptions arising from Covid-19 infections in its workforce and further cost pressures from higher raw material costs, while potential re-rating catalysts are an “increased wallet share” with customers and obtaining new customers. Cheong adds higher-than-expected factory utilisation rates and better-than-expected cost management to the list of potential catalysts.
As at 11.33am, shares in Frencken Group Limited were trading 3 cents or 2.52% down at $1.16.
