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Analysts up Frencken Group's TP to at least $2.49 on strong growth in semiconductor business

Felicia Tan
Felicia Tan8/26/2021 12:18 PM GMT+08  • 4 min read
Analysts up Frencken Group's TP to at least $2.49 on strong growth in semiconductor business
CGS-CIMB Research, Maybank Kim Eng and UOB Kay Hian have upped their TPs to $2.49, $2.63 and $2.52 respectively.
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Analysts from CGS-CIMB Research, Maybank Kim Eng and UOB Kay Hian are positive on Frencken Group, with maintained “add” and “buy” calls.

The optimism on the counter comes as the group reported a strong set of results for the 2QFY2021 and 1HFY2021 ended June.

Revenue for the 2QFY2021 grew 35.4% y-o-y to $191.1 million, while 1HFY2021 revenue increased 28.3% y-o-y to $375.3 million.

CGS-CIMB analyst William Tng has increased his target price on the counter to $2.49 from $2.34 previously.

This is based on the current FY2022 sector average price-to-earnings (P/E) of 15.0 times for tech stocks under the brokerage’s coverage (previously 15.3 times).

He has also upped his revenue estimates for FY2021 to FY2023 by 6.1-7.6%, and core earnings per share (EPS) to 6.8-12.4% for the same period.

The higher revenue and EPS estimates come as demand remains strong for most of Frencken’s business segments, writes Tng in an Aug 16 report.

Frencken’s 1HFY2021 revenue stood in line with his expectations at 51.0% of his FY2021 estimates. Net profit for the same period surpassed Tng’s expectations at 52% of his FY2021 forecast. The group’s net profit also beat consensus’ estimates at 57% of its FY2021 forecast.

To Tng, re-rating catalysts include new customer wins and stronger-than-expected sales in the semiconductor and industrial automation segments.

Downside risks include supply chain disruptions from new Covid-19 variants, he adds.

See also: Frencken Group sees 5.2% growth in 2H20 earnings of $23.8 mil; profit holds steady in FY20 despite slight dip in revenue

Maybank Kim Eng analyst Lai Gene Lih has raised his target price to $2.63 from $2.00 previously as he raises his EPS estimates by 6-15% for FY2021 to FY2023.

His new target price is based on 15.5 times FY2022 P/E, from 14.5 times FY2021 P/E, he writes in an Aug 16 report.

The higher target price is due to moderated cyclicality risks and an ongoing margin expansion trend.

That said, his target multiple of 15.5 times is slightly higher over Singapore-listed tech peers at an average of 13.9 times.

“We believe this is warranted as Frencken has executed well on earnings and margin expansion in recent years,” he writes.

“Moreover, we see reduced cyclicality as we expect semiconductor strength to be sustained in the next one to two years, while other end-markets continue their post-Covid-19 recovery,” he adds. “Key upside to our forecast is if there is lumpy capex from IA customer Seagate.”

To him, Frencken’s earnings, or PATMI at $31.3 million surpassed his estimates, as well as that of the consensus.

According to Frencken, revenue for the 2HFY2021 is likely to be “moderately stronger” than the figure posted in the 1HFY2021, as it expects semiconductor and automotive to be stable h-o-h.

Stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products and improving efficiencies, as well as an improving institutional interest are upside swing factors for Frencken, says Lai.

Meanwhile, an erosion in revenue resilience, supply chain disruptions and a lower-than-expected dividend pay-out could be downside factors for the stock.

Finally, UOB Kay Hian analyst Clement Ho has raised his target price on Frencken to $2.52 from $2.13 previously.

His new target price is pegged to 16 times FY2022 P/E, slightly above +2 s.d. with a three-year historical average of 15.1 times.

“Valuation at the current price of 13.7 times FY2022 P/E implies a 28% discount to the blended average P/E range of Frencken’s key customers of 19.1 times,” he writes in an Aug 24 report.

Like the previous analysts, Ho deems Frencken’s 2QFY2021 results as a “strong beat” with earnings of $16.6 million.

Net profit for the 1HFY2021 currently stands at 63% of Ho’s FY2021 estimate.

According to the analyst, the strong demand in the semiconductor segment is expected to continue into the FY2022.

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To this end, he has also upped his revenue estimates for the FY2021 and FY2022 by 5.6% and 6.5% to $746.7 million and $808.9 million respectively.

The raised estimates came from “tweaking our previous 2021 revenue growth assumptions for the semiconductor segment from +28.4% to +56%, a y-o-y contraction in revenue for the industrial automation segment from +18.3% to -8%, and sales growth for the automobile segment from -9% to +16%, in line with management guidance,” writes Ho.

Accordingly, his net profit estimates have increased by 20.5% and 20.3% y-o-y to $60.1 million and $67.1 million for the FY2021 and FY2022 respectively.

“We believe Frencken’s valuation is supported by its strong forward earnings compound annual growth rate (CAGR) of 24% over FY2020-2023,” he says.

As at 12.17pm, shares in Frencken are trading 4 cents higher or 1.84% up at $2.21, or FY2021 P/B of 2.4 times with a dividend yield of 2.0%, according to UOB Kay Hian’s estimates.

Photo: Frencken

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