DBS Group Research analyst Ling Lee Keng has upgraded her call on Frencken to “buy” from “hold” after the group reported improving margins and outlook in its business update for the 3QFY2023 ended Sept 30.
For the three-month period, Frencken saw revenue dip by 5.6% y-o-y to $184.4 million while profit attributable to equity holders of the company (patmi) fell by 35.1% y-o-y to $7.1 million.
That said, the group’s revenue and patmi have been improving sequentially from the 1QFY2023 to 3QFY2023. In the 3QFY2023, Frencken’s net margin improved slightly to 3.9% from 3.8% q-o-q.
“We expect to see further net margin further improvement, after reaching a trough of 3% in 1QFY2023,” says Ling in her Nov 23 report. “Frencken is also well positioned to ride on the recovery path for the technology sector, especially with 40% exposure to the semiconductor segment.”
The analyst also likes that the group is guiding for higher revenue for the 2HFY2023 for the semiconductor, medical, and analytical & life sciences segments, compared to the 1HFY2023.
That said, the industrial automation division is still expected to be weak due to its dependence on a key customer in the data storage space. Revenue for the automotive division is expected to be stable, says Ling.
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Frencken is also deemed to be well-positioned for the recovery in the semiconductor industry due to its sound balance sheet and diversified portfolio.
“We expect the semiconductor industry to register strong growth in 2024 and 2025, after a weak 2023. Semiconductor revenue is expected to dip 10.9% y-o-y in 2023 after a flat 2022 and recover with a strong gain of 16.8% in 2024 and 15.5% in 2025, according to Gartner,” Ling notes.
“Global semiconductor shipments in September 2023 showed a further improvement from the low in February 2023,” she adds.
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Leading microelectronics industry association, SEMI, also expects the industry’s rebound in 2024 to continue through 2026. This is thanks to wafer shipments setting new highs as silicon demand increases to support artificial intelligence (AI), high-performance computing (HPC), 5G, automotive, and industrial applications, the analyst continues.
“Coupled with its diverse exposure to multiple market segments and its sound financial position, Frencken is in a good position to weather the current headwinds and ride on the recovery path going forward,” she says.
In addition to her upgrade, Ling has raised her FY2023 and FY2024 earnings estimates by 15% and 43% respectively on higher margin assumptions. “We have assumed a net margin of 3.7% for FY2023 and 5.5% for FY2024, from 3.2% and 4.0% previously.”
To this end, her target price is raised to $1.33 from 78 cents previously. The new target price is pegged to 13x Frencken’s P/E, slightly above the four-year average P/E and up from 11x previously on the group’s improving outlook.
As at 10.56am, shares in Frencken are trading 4 cents higher or 3.7% up at $1.12.
