Analysts are mixed on Frencken Group E28 after the company announced its FY2022 ended Dec 31, 2022 earnings of $51.9 million, 11.7% lower than $58.7 million in FY2021.
UOB Kay Hian Research has downgraded its call to “hold”, with a lower target price of $1.08 from $1.36 previously, while DBS Group Research has reiterated its “hold” recommendation with a slightly increased target price of $1.09 from $1.06 previously. Maybank Securities has maintained its “buy” call with a lower target price of $1.15 from $1.35 previously.
On the other hand, CGS-CIMB Research has upgraded its call to “hold” from “reduce” previously, with an increased target price of $1.05 from 95 cents previously.
In his report dated March 1, UOB Kay Hian’s John Cheong says that Frencken’s FY2022 earnings of $51.9 million, although down y-o-y, beat his estimates by some 11%.
He notes that the company reported a “better-than-expected” net margin in 4QFY2022, increasing 0.8 percentage points y-o-y to 7.3%, while gross margins also improved 0.2 percentage points to 15.5% in 4QFY2022. “We believe these were due to normalising of energy costs in Europe and improving results of cost-sharing efforts undertaken by Frencken since the start of 2022,” says Cheong.
However, he points out that Frencken is adopting a cautious outlook for FY2023 considering the challenging macroeconomic environment. The company expects 1HFY2023 revenue to be softer than 2HFY2022 due to a slowdown across most of its key segments as its present business visibility is hampered by volatile market conditions, says Cheong.
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According to him, Frencken’s outlook for the various segments is to see lower revenue for its semiconductor segment, decreasing revenue for its medical segment, decreasing revenue for industrial automation, stable revenue for the automobile segment and higher revenue for analytical and life sciences.
As such, Cheong has cut his FY2023 and FY2024 earnings forecast for Frencken by 19% and 21% respectively, after reducing his revenue estimates by 12% and 15% to reflect the latest outlook provided by the company.
His decreased target price of $1.08 from $1.36 is pegged to a 10x FY2023 price-to-earnings ratio (P/E), while he notes that Frencken has a diverse stream of revenue sources, which could help the company remain resilient amid a volatile macro environment in the long-term.
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Ling Lee Keng of DBS agrees, noting that Frencken is a “one-stop” global integrated technology solutions provider with diversified product and customer base with diversification in a wide variety of industries that will help to provide resilience and stability for the company.
She expects costs to remain high in the near term as the group continues to create new pillars for growth and expand its production sites. “Despite this, we expect a slight improvement in margins from FY2023 onwards, from the low of 5.6% in 3QFY2022. The group expects its cost-sharing efforts with customers in Europe to yield a positive effect, though some of the positive impact could be offset by the still high inflationary pressure, especially in Europe,” Ling adds.
Overall, she projects a slight improvement in net margins to 6.7% and 6.9% for FY2023 and FY2024, from 6.6% in FY2022. Ling has reduced earnings for FY2023 slightly by 3% to account for the near-term weaker demand and operating costs that will remain high.
Her slightly higher target price of $1.09 from $1.06 is still pegged to an 8x P/E, slightly below Frencken’s four-year average, as she has rolled forward her blended valuation with FY2023 and FY2024 earnings.
Meanwhile, Maybank’s Jarick Seet has cut his FY2023 and FY2024 patmi by 12.7% and 1.3% respectively, in consideration of Frencken’s “worse-than-expected” outlook for its semiconductor segment.
He notes that although Frencken’s key European customer — which comprises 30% of the segment’s revenue — has a great outlook, the company’s other Asia-based semi customers are suffering slowdowns. “Its key semiconductor customer in Europe is doing well and Frencken is working with it to move some programs to Asia. However, another similar sized key customer with a large Singapore presence has a large existing inventory. Hence, new orders will likely be
pushed towards 2024 and will likely result in a slowdown for Frencken,” Seet explains.
The analyst adds that Frencken has also taken on a similar customer in Malaysia which is facing similar issues. As such, Seet believes a slowdown is “inevitable” for Frencken in the near term, and expects semiconductor revenue to pick up again in FY2024.
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Seet's lower target price of $1.15 from $1.35 previously is based on a lower 9x FY2023 and FY2024 blended P/E valuation, as he believes Frencken is “primed” for a rebound in FY2024.
However, William Tng and Izabella Tan of CGS-CIMB say that Frencken’s expected earnings recovery in FY2024 has created potential earnings per share (EPS) growth. They believe some of the current earnings downside risk have already been priced in.
Still, given the cautious revenue outlook issued by Frencken, they have pared our FY2023 FY2024 revenue forecasts by 9.1% to 9.7%, leading to a 10.0% to 14.8% decrease in their FY2023 FY204 EPS forecasts. The analysts have rolled over their valuation to FY2024, while their slightly increased target price of $1.05 from 95 cents previously is based on an 8.6x 5-year average P/E.
Their upside risks include a less severe slowdown in Frencken’s semiconductor business segment, better cost control and greater concessions from customers on costs passed through by the company. Potential de-rating catalysts include further cost escalations affecting net profit negatively and a further weakening of demand in its semiconductor business segment.
As at 3.45pm, shares in Frencken were trading 5 cents or 5.10% up at $1.03.
