Frencken Group - UOB Kay Hian 2022-05-25: 1Q22 Impacted By Mounting Cost Pressures & Automobile Disruptions

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FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - 1Q22 Impacted By Mounting Cost Pressures & Automobile Disruptions

• Frencken’s weak 1Q22 earnings of S$12.8m (-12.6% y-o-y, +1.7% q-o-q) was impacted by rising cost pressures and disruptions in the automobile industry.
• We believe the global automobile industry will continue to be plagued by an extended period of slow production due to the semiconductor chip shortage and prolonged Russia-Ukraine conflict, which would negatively impact Frencken’s automobile segment. We have lowered our target price for Frencken.

Frencken's 1Q22 Results

• Growth across most but the automobile segment. Frencken (SGX:E28)’s 1Q22 revenue of S$198.4m (+9.3% y-o-y) was led by growth from the semiconductor (+15.5% y-o-y), analytical & life sciences (+16.7% y-o-y) and industrial automation segments, while sales in the medical segment remained relatively stable. However, the automobile segment (-10.7% y-o-y) was impacted by constrained customer demand as a result of:
  1. semiconductor chip supply chain challenges, and
  2. disruptions arising from the Russia-Ukraine conflict, which hosts assembly plants for automobile components ranging from electrical cables to catalytic converters and seatbelts.
• Cost pressures mount. Gross margin narrowed in 1Q22 to 15.4% (1Q21: 17.3%, 4Q21: 15.3%), due to higher prices of raw materials, freight and energy. While Frencken’s manufacturing facilities were not impacted by the COVID-19-related lockdowns across China, those of its customers were, and finished products were unable to be shipped across.
• Over the longer term, however, we believe Frencken is able to pass on a portion of the higher costs incurred to the customers.

2H22 to be sequentially better.

• Management is working to overheads for Frencken in the near term from increased depreciation expenses, as well as added overheads from acquisitions.

Frencken - Earnings forecast revision & Recommendation

• No changes to our sources, which would help the company stand out amid a volatile macro environment.
• See
  • Frencken's Share Price,
  • Frencken's Target Price,
  • Frencken's Analyst Reports,
  • Frencken's Dividend History,
  • Frencken's Announcements,
  • Frencken's Latest News.
• Catalysts:
  • Higher-than-expected factory utilisation rates.
  • Better-than-expected cost management.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-25

SGX Stock Analyst Report BUY MAINTAIN BUY 1.63 DOWN 2.060