Analyst Donovan Tan of OCBC Investment Research has initiated “buy” on Frencken Group E28 . He has also given the group a fair value (FV) of $1.74.
Tan notes that due to the semiconductor (semicon) industry’s “cyclical” nature, it has begun to “show signs” of an uptick since 3QFY2023, which he attributes to advancements in artificial intelligence (AI) solutions.
“This presents a significant growth opportunity for the broader semiconductor market, including key players like Frencken. In its 1QFY2024 update [ended March 31], Frencken demonstrated ongoing recovery with revenue and net profit reaching $193.6 million and $9 million, respectively, marking a 12% and 73% y-oy increase,” writes Tan.
He adds that with Frencken “effectively addressing” its surplus inventory and its utilisation rate of 60%, the company is “well-positioned” to ride on the semicon industry’s revival and subsequent surge in orders.
Tan continues: “Additionally, having a net cash balance sheet of $62.2 million not only serves as a buffer against potential financial challenges but also allows Frencken to make strategic investments or pursue growth opportunities when they arise.”
Another point of strength to note for Frencken is its “diverse segments that require unique capabilities”, says the analyst.
He highlights that the company’s long-standing partnerships require significant capital expenditure (capex) and time, meaning potential competitors are less likely due to the high-entry level needed.
“We anticipate that Frencken will continue to experience growth alongside its customers, as they entrust Frencken with new programs and products,” writes Tan.
Frencken’s other segments are also experiencing robust growth, with its medical segment showing a 11.4% increase y-o-y and its analytical and life sciences growing 15.2% y-o-y in FY2023 respectively.
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“Furthermore, Frencken will benefit from its strategic shift to Asia, as its European customers increasingly move production offshore due to labour market challenges in Europe,” adds Tan.
The analyst’s FV, which is two standard deviations (s.d.) from the five-year average, is based on a 15.5 times price-to-earnings ratio (P/E) on his forecasted 12-month blended forward earnings per share (EPS).
Tan continues: “ We have used a higher P/E multiple to value Frencken as we anticipate that the semiconductor recovery would lead to an expansion in operating profit margins and consequently a double-digit EPS growth, as the company scales with increased volumes.”
From a consensus forward 12-month price-to-book value ratio (P/B) valuation perspective, Frencken is currently trading at 1.38 times, inflecting upwards by 0.2 s.d. from its five-year historical average of 1.3 times.
“We believe that this upward re-rating will continue on the back of increasing confidence in the turnaround expectations for the industry. We are cautiously optimistic about Frencken's turnaround as the semiconductor recovery continues to unfold,” concludes Tan.
Potential catalysts noted by him include the semiconductor upcycle, new product inductions from the company and lastly, improving institutional interest driven by the hype in tech. Conversely, investment risks include customer concentration risk, ongoing conflicts in Ukraine and the Middle East, and a continued weakness in industrial automation.
Shares in Frencken closed eight cents higher or 5.23% up at $1.61 on June 6.
