Frencken Group - UOB Kay Hian 2021-08-24: 2Q21 Semiconductor Industry Component Shortage Spurring Growth

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - 2Q21 Semiconductor Industry Component Shortage Spurring Growth

Frencken’s 2Q21 results were a strong beat with earnings of S$16.6m (+80.2% y-o-y), bringing 1H21 net profit to 63% of our full-year estimate. Revenue for the semiconductor segment (+62.1%) was led by strong demand for front-and back-end equipment, contributing to positive operating leverage.
The strong demand outlook in the semiconductor segment is expected to remain through to 2022. Maintain BUY rating on Frencken and increase target price to S$2.52.

Frencken (SGX:E28)’s 2Q21 net profit of S$16.6m (+80.2% y-o-y, +13.3% q-o-q) brought 1H21 earnings to 63% of our 2021 estimate of S$49.9m. The beat was led by gross margin expansion, primarily driven by outperformance from the semiconductor segment. 2Q21 revenue jumped 36.6% y-o-y to S$193.8m (+6.7% q-o-q) from broad-based growth across the semiconductor (+62.1% y-o-y, +13.7% q-o-q), analytical (+52.2% y-o-y, +11.1% q-o-q) and automobile (+79.8% y-o-y, +0.7% q-o-q) segments, but was partially offset by slower sales in industrial automation (- 13.5% y-o-y, -13.3% q-o-q).
Scaling up from positive operating leverage. Frencken's 1H21 gross margin expanded to 17.4% (+1.9ppt y-o-y), while better-than-expected operational efficiencies helped uplift operating margin to 10.3% (+2.1ppt y-o-y). The latter was driven by Frencken’s ongoing focus on reducing operating excesses.
Positive m-o-mentum to continue into 2H21. The semiconductor segment is expected to maintain its m-o-mentum into 2H21, as indicated by management. Additionally, higher revenue indications are also anticipated from the medical and analytical segments, due to a growing customer base and resumption of orders following the onset of the COVID-19 pandemic. However, revenue from the industrial automation segment is expected to soften, while the automobile segment is expected to remain stable.

Demand for semiconductor components to remain strong. The current chip cited that demand for equipment is likely to be sustained into 2022.

We raise our 2021 and 2022 for 2021 and 2022 have risen 20.5% and 20.3% to S$60.1m and S$67.1m respectively.

Maintain BUY with a higher target key customers of 19.1x.
See
We believe Frencken’s valuation is supported by its strong forward earnings CAGR of 24% over 2020-23.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-24

SGX Stock Analyst Report BUY MAINTAIN BUY 2.52 UP 2.130