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Positive sentiment on Frencken, analysts keep ‘buy’ in anticipation of semicon recovery

Douglas Toh
Douglas Toh • 4 min read
Positive sentiment on Frencken, analysts keep ‘buy’ in anticipation of semicon recovery
The overall outlook on Frencken is a bullish one. Photo: Frencken
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Analysts at Maybank Securities, RHB Bank Singapore and UOB Kay Hian Research have all maintained their “buy” calls on Frencken Group following the company’s strong 1QFY2024 ended March results.

While Maybank and UOBKH have both kept their target prices of $1.77 and $1.74 unchanged, RHB analyst, Alife Yeo has raised his target price $1.81 from $1.80 previously.

In his May 16 report, Yeo writes that Frencken’s 1QFY2024 revenue and earnings had met his expectations, and he believes the company will continue to strengthen its revenue due to it being a “beneficiary of the anticipated semiconductor recovery” going forward.

He notes that the company’s 73% y-o-y growth in earnings to $9 million stems from its stronger topline and gross margins, while its revenue growth was mainly driven by the mechatronics division, which leapt 14.4% y-o-y to $170 million, driven by growth in the semiconductor segment, which jumped by 37.4% y-o-y which benefited from robust sales of the company’s key European customer and modest sales growth from its Asia operations.

“Frencken’s 1QFY2024 revenue and earnings puts it on track to meet our earnings forecast. It guided that 1HFY2024’s revenue should be comparable to 2HFY2023,” writes Yeo.

He adds: “Beyond that, we anticipate a pickup in activity, especially in the semiconductor segment, and believe that 2HFY2024’s revenue will outperform 1HFY2024’s.”

See also: PhillipCapital initiates ‘buy’ call on CSOP iEdge S-REIT ETF with TP of 87 cents

Particularly on the company’s semiconductor segment, while the RHB analyst believes that a board-based recovery is still a distance away, near-term growth “should stem from customers expanding capacity in Europe and Asia”, as Frencken’s customers continue to build up their inventory buffers for production equipment.

Maybank analyst Jarick Seet similarly point out that the company has relocated its US operations to a larger facility and expanded its motor business supporting semiconductor equipment customers in anticipation of the industry’s recovery.

“They are also working with a US front-end equipment customer to expand the range of programmes, which is likely to translate into higher revenue in the future,” adds Seet.

See also: RHB lifts SGX’s TP to $10.40 after strong operating data in May

Beyond Frencken’s semiconductor segment, Seet also expects 2QFY2024 and the subsequent quarters to be stronger q-o-q due to new net production introductions in its automotive, life science and medical segments.

He also sees a pick up in its margins due to higher operating leverage. Already, Seet is encouraged by the company’s Southeast Asia utilisation which has picked up to 60% to 70% from 50% in 3QFY2023.

He concludes: “We continue to like Frencken and believe it will remain a key beneficiary of the semi-con recovery. It remains our Top Pick in the Singapore tech sector.”

For UOBKH’s John Cheong, Frencken’s 1QFY2024 results were in-line with his expectations, with its $193.6 million revenue and $9 million in earnings forming 24% and 21% of his full-year forecasts respectively. 

“Tapping on its expanded capacity and strategically positioned manufacturing sites in Europe, Asia and the US, Frencken remains focused on its programmes for existing and new customers to ensure it is well-positioned for a recovery in the global economy and technology sector,” writes Cheong.

Notably, Cheong’s target price for Frencken continues to be pegged to the same 17 times FY2024 price-to-earnings ratio (P/E), which, at two standard deviations (s.d.) above the mean P/E, is to capture the recovery in the semiconductor cycle and an improvement in earnings quality as the automobile segment could see more contributions from new customers in the electric vehicle (EV) space.

Share price catalysts include higher-than-expected factory utilisation rates and better cost management and improving institutional interest, which could help the stock re-rate towards peers’ valuations. 

Conversely, a later-than-expected demand recovery and supply chain disruptions are key risks.

As at 11.15 am, shares in Frencken are trading flat $1.38.

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