Frencken Group - DBS Research 2021-08-13: Riding On Semiconductor Super Cycle


Frencken Group - Riding On Semiconductor Super Cycle

  • Frencken reported robust set of 1H21 results, slightly above expectations..
  • Improvement in gross margin, helped by the automotive segment.
  • Semiconductor, Medical and Analytical expect to record higher revenues in 2H21 vs 1H21; Industrial Automation to soften while Automotive stable.
  • Raised FY21F/FY22F earnings by 13%/15%; maintain BUY with a higher target price of S$2.65.

Robust 1H21 results with better performance from almost all key segments

  • Frencken (SGX:E28)'s 1H21 net profit surged 67% y-o-y to S$31.3m on 28% growth in revenue to S$375.3m. 1H21 results were also better than 2H20. Net profit gained 31%, while revenue was up 14% on a h-o-h basis. All key segments did well, except for the Industrial Automation division, where sales are typically lumpy in nature.
  • Overall, 1H21 revenue and net profit account for 52%/55% of our forecasts, slightly above expectations.

Improvement in gross margin, helped by the automotive segment.

  • The gross profit margin improved to 17.4% in 1H21 from 15.5% in 1H20 due mainly to a higher gross profit margin for the automotive segment. The net profit margin increased to 8.3% in 1H21 from 6.4% in 1H20 and 7.3% in 2H20.
  • Semiconductor still the star performer, 1H21 revenue grew 60% y-o-y. The group benefited from higher orders for both front-end and back-end semiconductor equipment from customers in Europe and Asia, reflecting the continued growth of the global semiconductor industry amid the COVID-19 pandemic.
  • Orders for Medical segment gaining momentum; revenue was up 11.5% y-o-y attributable mainly to a recovery in sales of medical equipment to customers in Europe and Asia. Elective surgery could also make a comeback this year, benefitting Frencken, whose products include patient tables and pathology digital scanners.
  • The Analytical segment’s revenue increased 29.4% y-o-y due primarily to higher demand from customers in Europe.
  • Revenue of the Industrial Automation segment softened 7.7% y-o-y in 1H21 due to lower shipments of storage drive production equipment to a key customer. Sales of this segment are typically lumpy in nature and dependent on the capital expenditure requirements of key customers.

Recovery in Automotive; 1H21 revenue was up a strong 40.3% y-o-y.

  • The shifting of resources back to the production of automotive chips has led to the rebound. The automotive industry was affected by the chip shortage in 2H20 when car makers made a dash for chip supplies as demand picked up but capacity was mostly filled by chips for other usages.
  • With the return of auto chips and new products coming onstream, the automotive segment is expected to recover from FY20. Though Frencken is not directly involved in the production of EV, the interior plastic decorative parts and other parts like dashboards and gearbox filters, which Frencken has been producing for the automotive division, are still needed in an electric car. Going forward, with EV and autonomous driving gaining popularity, more parts and electronics are need. Hence, opportunities are robust and interesting for the automotive division.

Outlook for 2H21:

  • The Semiconductor, Medical, and Analytical divisions are expected to record higher revenues in 2H21 vs 1H21; Industrial Automation to soften while the Automotive nticipated to record stable revenue.

Raised FY21F/FY22F earnings by 13%/15%.

  • Earnings forecast for Frencken in FY21F/FY22F were raised by 13%/15%. We have assumed higher contributions from the Automotive and Analytical segments, and we raise our gross margin assumption by 60 to 70 basis point for FY21F and FY22F to 17.8% and 18.0% respectively. We have also added an earnings estimate for FY23F.

Maintain BUY with higher target price of S$2.65.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 2.65 UP 1.980