CGS International (CGSI) analyst William Tng is keeping his “add” call on Frencken Group E28 at a lowered target price of $1.55 from $1.70 previously.
Tng notes that US equity researcher Raymond James has lowered its base case FY2025 revenue growth forecast for wafer fab equipment to mid-single-digit from high-single-digit previously.
“In its 3QFY2024 earnings call, ASML commented that it expects revenue from China to normalise to 20% of its FY2025 total revenue as the order backlog for China has been fulfilled and the group is factoring in potential additional export controls that could affect its China revenue,” notes Tng.
The Dutch manufacturer has also noted that customers are delaying their fab investments and hence shipments of ASML products to these customers could be pushed into FY2026.
“As ASML is the key semicon customer for Frencken (the semicon segment accounted for 42.1% of 1HFY2024 revenue), we think ASML’s commentary could affect Frencken’s FY2025 semicon revenue.”
In the company’s 1HFY2024, its analytical life sciences segment accounted for 24.4% of revenue.
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Tng writes: “In our view, Thermo Fisher is a key customer in this segment. In its 3QFY2024 results call, Thermo Fisher highlighted that economic activity in China was muted and the company is hoping that government stimulus could help boost demand in FY2025.”
Meanwhile, Frencken’s medical segment accounted for 16.6% of Frencken’s 1HFY2024 revenue.
“We believe Philips Healthcare is the key customer here. For 3QFY2024, Philips reported that sales were flat and orders decreased as demand from hospitals and consumers in China further deteriorated,” writes the analyst.
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He continues: “The company expects market conditions in China to remain uncertain as the industry-wide anti-corruption measures and lack of impact from the national renewal programme continued to significantly affect order and lead times.”
Overall, Tng sees that order recovery among Frencken’s semicon customers, while slow, is intact, which could lead to a resumption of core earnings per share (EPS) growth in FY2025 to FY2026.
Potential re-rating catalysts noted by him include a faster recovery in its semicon business segment driven by new end-consumer products, better cost controls, and greater concessions from customers on cost pass-throughs.
Conversely, downside risks include further cost escalation affecting Frencken’s net profit negatively, and further weakening in demand for its semicon business segment.
As at 2.56 pm, shares in Frencken are trading 3 cents higher or 2.59% up at $1.19.
