Analysts at Maybank Securities and UOB Kay Hian (UOBKH) have both kept their “buy” calls on Frencken Group E28 as they expect to see a gradual recovery across most of the group’s segments moving forward.
While UOBKH analyst John Cheong has maintained his target price of $1.74, Maybank’s Jarick Seet has lowered his target price to $1.54 from $1.77 previously.
Maybank’s Seet notes that the group has not received a large ramp up in orders in the semiconductor sector. Instead, he believes that the acceleration in orders will likely occur from 2QFY2025 to 3QFY2025.
“We still expect profitability to be stronger in 2HFY2024 versus 1HFY2024 but earnings likely won’t be as strong as anticipated due to slower-than expected growth in the life science sector,” writes Seet in his Oct 14 report.
He adds: “As a result of higher margins from semi-con and better operating leverage, we expect gross and net margins to further improve, as shown in 1HFY2024 when gross margin rose from 12.3% in 1HFY2023 to 14.8% in 1HFY2024 and net margin jumped from 1.5% to 4.8%.”
Meanwhile, Frencken’s life science segment which performed well during Covid-19, is now showing signs of slowing down.
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Although Seet sees room for growth in the segment, he notes that it will likely be less than earlier anticipated.
As a result, although the analyst has cut his FY2024 and FY2025 profit after tax and minority interests (patmi) by 15% and 18% respectively, Frencken remains his top pick in the Singapore tech sector.
“While the majority of its local peers are suffering significant declines in net profit after tax (NPAT), Frencken’s NPAT is slated to grow strongly in the next few years.”
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Upside swing factors noted by Seet include stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products and improving efficiencies, and lastly, 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 as well as a lower-than-expected dividend pay-out.
On the other hand, UOBKH’s Cheong understands that Frencken is able to leverage on its diverse business segments, as it provides integrated manufacturing solutions for multinational companies in the semiconductor, analytical life sciences, automobile, healthcare and industrial automation sectors.
“Long-standing customers like Philips value Frencken for its high precision and cleanroom capabilities. In the semiconductor segment, Frencken has moved from a supplier of components to an entire fab processing system. In addition, it focuses on customers who are leaders in their field and it aims to be relevant and grow together with its customers,” writes Cheong.
Like his fellow analyst, Cheong sees a more meaningful recovery in the semiconductor space to arrive only in 2HFY2025.
He continues: “On the other hand, Frencken continues to see a long tailwind of growth in the analytical life sciences segment, but recovery is slower than expected due to weaker demand experienced by its major customers.”
The group’s automobile segment could also see a slower ramp-up in orders, due to some uncertainties of its major customers on the decision of either to focus on electric vehicles or traditional vehicle platforms.
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Meanwhile, its industrial automation and healthcare segments are expected to be stable, with some fluctuations for its industrial automation segment as revenue has reached a base run rate based on its customer’s guidance.
Overall, Cheong is bullish on the group.
He concludes: “Backed by its diverse exposure to multiple market segments in the high technology industry and the strength of its balance sheet, Frencken is confident of weathering the current headwinds and will continue to focus on investments in programmes for existing and new customers.”
Share price catalysts noted by Cheong include higher-than-expected factory utilisation rates and better cost management.
As at 10.46 am, shares in Frencken are trading 2 cents higher or 1.58% up at $1.29.
