RHB Group Research analyst Alfie Yeo has maintained their “neutral” call on Frencken Group E28 with a lower target price of $1.14 from $1.24 previously on high inventory and weak end-demand still prevailing in the chip sector.
The chip sector is expected to be weak in 1H2023 from soft consumption of electronics as well as the high level of semiconductor inventories, says Teo. Citing Gartner’s semiconductor inventory index, inventory levels will likely remain high and range between a moderate and severe surplus, he adds.
“This is in tandem with the weak demand and semiconductor oversupply for components for the majority of 2023. Global personal computer shipments were also down by 29% y-o-y in 1Q2023, according to International Data Corp,” says Yeo.
Additionally, ASML Holding — which is a key contributor to Frecken’s mechatronics division sales from the semiconductor sector — is facing risks of extreme ultraviolet equipment order cuts from its largest customer, Taiwan Semiconductor Manufacturing Co (TSMC).
TSMC has pared down its 2023 capital expenditure, which would have a trickle down effect and dampen Frecken’s earnings growth over the near term. Following these, RHB has cut its FY2023 and FY2024 net profit estimates by 6% and 5% to $49 million and $52 million to reflect the deferment of orders.
Meanwhile, Frencken’s FY2022 earnings are largely in line with RHB’s expectations at $52 million, 12% lower y-o-y. This was on the back of 2.5% y-o-y growth revenue to $786 million.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
Revenue for the mechatronics division grew 4% y-o-y, led by the medical sector and increased orders from front-end semiconductor equipment customers in Europe and Asia. The revenue for the integrated manufacturing services division, on the other hand, declined by 11% y-o-y due to the weaker-than-expected recovery of the global automotive industry amid supply chain disruptions.
Gross processing margin narrowed to 15.1% as a result of cost pressures in Europe and higher depreciation costs from its global manufacturing expansion. This also pulled Frecken’s EBIT margin down to 8.5% despite some operational cost efficiencies.
Moving forward, key upside risks to RHB’s earning forecasts include a sooner-than-expected recovery in semiconductor demand.
As at 11.55am, shares in Frencken are trading 1 cent higher or 0.96% up at $1.05.
