Frencken Group - UOB Kay Hian 2022-08-16: 1H22 Impacted By Cost Pressures But Improvement Expected In 2H22

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - 1H22 Impacted By Cost Pressures But Improvement Expected In 2H22

Frencken (SGX:E28)'s 1H22 earnings of S$26m (-17% y-o-y) were largely in line, forming 39% of our full-year estimate. 1H22 revenue grew 4% y-o-y: semiconductor (+9% y-o-y), life science (+7% y-o-y) and industrial automation (+7% y-o-y) recorded growth while medical (-7% y-o-y) and automotive (-17% y-o-y) declined.

Frencken expects to pass on higher costs to customers in 2H22 and expects higher h-o-h revenue across all segments except for industrial automation. Maintain BUY and target price of S$1.60.

Growth across most segments except medical and automotive. Frencken’s 1H22 revenue of S$389m (+3.6% y-o-y) was led by growth from the semiconductor (+9% y-o-y), analytical & life sciences (+7% y-o-y) and industrial automation segments (+7% y-o-y). Growth in the semiconductor space was lifted by higher orders for front-end semiconductor equipment from customers in Europe and Asia, while the analytical & life sciences segment enjoyed higher sales to customers in Europe and Asia.
However, sales in the medical (-7% y-o-y) and automotive segment (-17% y-o-y) were impacted by constrained customer demand as a result of continuing bottlenecks in the global supply chain.

Gross profit margin eased to 15.6% in 1H22 from 17.4% in 1H21 due to a variation in sales mix and inflationary cost pressures. In addition, depreciation expenses also climbed in 1H22 as a result of Frencken’s capital investments to upgrade and expand its global manufacturing facilities.
Frencken has witnessed success in its efforts to mitigate the inflationary cost pressures through its operational initiatives and passing on some of the increased input costs to customers from 2H22. Supply chain challenges weighing down the global automotive industry are also anticipated to ease in 2H22.
2H22 to be sequentially better. Frencken expects revenue in 2H22 to show a moderate increase h-o-h. On the outlook for 2H22 vs 1H22, growth is expected in the semiconductor, medical, analytical & life sciences and automotive segments, while the industrial automation segment is anticipated to register lower revenue.

To meet the overall demand from customers, Frencken has been making significant capital investments since 2021 to increase production space, capacity and competencies, as well as to expand its skilled workforce.
In 2H22, Frencken will continue working actively on the preparation of new sites and production facilities in Europe, Malaysia and Singapore to cater for future business growth. In the interim period, these investments will increase costs as Frencken sets up and qualifies the new facilities.
Frencken will be positioned to pursue additional revenue drivers for 2023 and beyond.

We reduce our 2022/23/24 earnings forecast for Frencken by 16%/17%/21% after reducing our revenue estimate by 5%/9%/13% to reflect lower demand across all the sectors due to slower global economic growth.
Also, we lower our gross margin assumption to 16.1%/16.1%/16.2%, down from 17.4%/17.4%/17.4%, to factor in supply chain disruptions, inflationary pressures due to rising raw materials, labour, freight and energy prices as well as workforce disruptions in China.
Maintain BUY recommendation on Frencken with target price of S$1.60, pegged to 10.4x 2022F P/E, or Frencken’s historical mean P/E. We have rolled over our valuation base year to 2023 from 2022, hence our target price remains unchanged despite a reduction in our earnings estimate.
See
We maintain the view that the 2023F P/E valuation of 7.5x for Frencken is attractive due to its diverse stream of revenue sources, which would help the company stand out amid a volatile macro environment.
Catalysts: Higher-than-expected factory utilisation rates, better-than-expected cost management.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-16

SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 DOWN 1.630