CGS-CIMB Research analyst William Tng has raised his target price for Frencken Group to $2.34, up from $1.87 previously, ahead of its 1HFY2021 ended June results announcement on August 12.
In an August 4 research note, he reiterates his “add” call for the counter. His higher target price is underpinned by an earnings upgrade as well as a higher FY2022 sector average P/E of 15.3 times, up from 13.5 times previously; to which his target price is pegged.
Tng believes Frencken could see 2QFY2021 net profit growth of 62.7% y-o-y, given the strong performance of the semiconductor industry. He anticipates a 50:50 core net profit split between the 1H and 2H for the FY2021, a departure from the historical average split of 60:40.
One factor for his bullish outlook is the raised sales guidance from ASML Holdings, one of Frencken's key customers within the semiconductor segment. Citing research from brokerage firm Liberum, Tng notes that following its 2Q2021 results, ASML has raised its revenue growth guidance for 2021 from 12% to 35%, with total revenue of EUR 18.9 billion ($30.2 billion) anticipated.
"Liberum sees the additional 23% revenue growth, or EUR3.2 billion, being driven by a very strong cyclical upturn in the industry, resulting in capacity shortages and a rush by semiconductor manufacturers for additional capacity," Tng says.
To that end, he has raised his revenue forecasts for FY2021-2023 by 3.8%-4.5%, incorporating higher semiconductor sales contribution to Frencken’s group revenue. “With better economies of scale, we also project some margin improvements,” he adds.
Tng notes that downside risks to his call are supply chain disruptions due to Covid-19, while re-rating catalysts could come from new customer wins and stronger-than-expected sales in the semiconductor and industrial automation segments.
Shares in Frencken closed 4 cents or 1.84% higher at $2.22 on August 6.
