Frencken Group - RHB Invest 2022-08-16: A Muted Outlook; Downgrade To NEUTRAL

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - A Muted Outlook; Downgrade To NEUTRAL

Frencken (SGX:E28)’s 1H22 revenue ticked up by 3.6% y-o-y to S$388.9m, but its PATMI declined by 16.6% y-o-y to S$26.1m – this accounts for 50% of our forecasts, ie in line.

Going forward, we should see some margin recovery as old contracts and open purchase orders (POs) are extended, and higher prices are imputed into the new contracts. However, its performance in FY22 may worsen y-o-y, so we cut our call on Frencken to NEUTRAL, for now.

Frencken's management thinks that margins likely bottomed in 1H22, and will likely strengthen in the subsequent quarters, as new contracts and POs with higher prices replace the existing, lower-margin ones. However, Frencken has started preparations on its non-new sites and production facilities in Europe, Malaysia and Singapore to cater for future business growth. This will increase costs.
That said, revenue from the increased capacity will likely only flow in from FY23F onwards. As a result, we expect Frencken's net margins to still remain muted in FY22.

Frencken's management continues to see growth in the semiconductor, medical and live science as well as automotive segments – the latter will likely undergo a rebound after a weak 1H22. However, we expect revenue growth to be muted this year, as many of the new projects will likely only ramp up after the new facilities are ready and qualified.

Our downgrade is premised on the fact that Frencken's share price is now close to our target price, and Frencken’s outlook is somewhat lacklustre. There should be more clarity on its expansion plan by end-3Q or in 4Q – and, in the meantime, investors can focus on other stocks in the same sector to yield more returns.
That said, we remain confident in management’s ability to enable Frencken to perform better once its expansion plans are completed, and FY22F should just be a temporary blip in its long-term outlook.

Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% premium to our intrinsic value to derive our target price for Frencken.
Downgrade Frencken to NEUTRAL from Buy, S$1.24 target price, 4% upside with ~3% FY22F yield.
See
Key risks include a rise in material and overhead costs, and a downturn in semiconductor demand.

Jarick Seet RHB Securities Research | https://www.rhbgroup.com/ 2022-08-16

SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 1.240 SAME 1.240