RHB Bank Singapore analyst Alfie Yeo has kept his “neutral” call on the group due to a mixed near-term outlook and the group’s “slightly lofty valuation”.

As at Yeo’s report dated Sept 11, shares in Frencken were trading at $1.02, which is 11x its FY2024 P/E and +0.5 standard deviation from its five-year mean.

For the 1HFY2023 ended June, Frencken’s revenue of $351 million stood in line with Yeo’s expectations although its earnings of $12 million stood below his estimates. The lower-than-expected earnings was attributed to lower margins and higher-than-expected costs.

Both of Frencken’s mechatronics and integrated manufacturing services (IMS) segments saw revenue decline by 11% and 4% y-o-y respectively to $303 million and $46 million due to lower sales in Asia and mitigated by better sales in Europe.

As Frencken’s 1HFY2023 earnings stood below estimates, Yeo has cut his net profit expectations for the FY2023 by 17%.

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At the same time, he has upped his earnings estimates for the FY2024 to FY2025 by 17% each as he expects the semiconductor industry to recover in 2024.

“According to Semiconductor Equipment and Materials International (SEMI), the global semiconductor industry is on track for recovery in 2024 as the decline in chip sales moderates in 2H2023 and drawdown of inventory normalises,” Yeo writes in his Sept 11 report. “We expect fab utilisation rates to pick up and drive the recovery sometime next year on the back of improved electronics sales at more normalised inventory levels.”

“However, we remain cautious on electronics demand recovery and the pace of inventory drawdown, which could potentially delay the recovery pick-up in fab utilisation, affecting Frencken’s growth momentum in FY2024,” he adds. “Nonetheless, we expect the group’s 2HFY2023 revenue to be comparable with 1HFY2023, in line with chip inventory correction which is still at play.”

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“Revenue for its semiconductor and analytical & life sciences segments should pick up [in] 2HFY2023, while the medical and automotive segments are anticipated to register stable revenue. However, the industrial automation segment’s revenue is anticipated to decline,” he continues.

Despite his “neutral” call, Yeo has raised his target price to 97 cents from 80 cents. His new target price is based on 10x Frencken’s P/E after rolling over his earnings base to FY2024 from blended FY2023-FY2024 earnings.

Maybank Securities' Jarick Seet has kept his "buy" call with a higher target price of $1.27 from 97 cents previously after the group's key customers ASML and Applied Materials (AMAT) raised their revenue forecasts. Seet's new target price is based on 11x of the group's FY2024 P/E, up from 9x previously.

The raised forecasts should benefit the group's Singapore and Malaysia factories on the back of a recovery in orders in FY2024. "[This is] especially when ASML is also shifting some of its production from Europe to Malaysia," says Seet in his Sept 13 report.

In addition, Seet believes that Frencken's performance has likely bottomed in the 1QFY2023 in line with its management's guidance for a higher semi-con revenue in 2HFY2023.

This signals that the "worst is possibly over".

"We are now more confident of a stronger FY2024... We also raise [our] FY2024 patmi [estimates] by 8.5% on better margins due to higher operating leverage and better utilisation across [the group's] Southeast Asian] factories," says Seet.

Frencken, which is the analyst's top pick across the tech stocks within Maybank's coverage, should "continue to gradually improve in subsequent quarters but we believe semi-con has already bottomed for [the group]," the analyst adds. "Trading at just 9.3x FY24x P/E, we see attractive upside, especially if the semiconductor recovery materialises as expected."

Shares in Frencken closed flat at $1.02 on Sept 11.

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