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Results Analysis: 3Q21 in line; semiconductor remains the biggest contributor

  • 3Q21 results in line; semiconductor remains the biggest contributor
  • Slight drop in margins due to higher material and freight costs
  • Medical and Analytical expect to record higher revenues in 2H21 vs 1H21; Industrial Automation and Automotive to soften while Semiconductor stable
  • No change in earnings forecasts and TP of S$2.65. Maintain BUY. We like Frencken for its diversified portfolio, which provides resilience and stability 
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3Q21 results in line; semiconductor remains the biggest contributor. 3Q21 group revenue was up 18.7% y-o-y to S$196.5m, lifted by higher sales of the semiconductor, analytical and medical segments, and partially offset by softer sales of the industrial automation and automotive segments. Semiconductor remains the biggest contributor, accounts for 36% of the total group revenue, vs 38% in 1H21. Revenue for this segment grew 43% y-o-y but eased 4% on a q-o-q basis.

Slight drop in margins due to higher material and freight costs. Gross profit margin eased slightly to 17.1% in 3Q21 from 17.6% in 3Q20, due mainly to increases in material and freight costs. Overall, net profit was up 10.7% y-o-y to S$14.8m.

For the 9-month period, net profit increased 43.7% y-o-y to S$64.1m on the back of the 24.8% gain in revenue to S$571.8m, accounting for 75%/72% of our revenue/net profit forecasts, broadly inline. Gross profit margin expanded to 17.3% from 16.3% in 9M20 due to higher revenue and shift in sales mix.

Snapshot of 3Q21 business update

S$m3Q213Q20y-o-y (%)q-o-q (%)
Revenue196.4165.5+18.7+1.4
Net profit14.813.3+10.7-11.3
Net margin 7.5%8.1%  
Source: Company, DBS Bank
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3Q21 key segmental revenue

3Q21 RevenueS$mY-o-Y (%)
Mechatronics Division168.9+22.6
Semiconductor71.6+42.7
Medical25.4+21.8
Analytical38.2+29.0
Industrial Automation28.6-17.0
   
IMS Division27.5
Automotive20.1-5.6
Consumer and Industrial electronics5.2+18.1
Source: Company, DBS Bank

Outlook for 2H21:

Medical and Analytical divisions are expected to record higher revenues in 2H21 vs 1H21, with contribution from both existing and new products. Elective surgery could also make a comeback post the COVID pandemic, benefitting Frencken, whose key products include patient tables and pathology digital scanners. 

Both the Industrial Automation and Automotive segments are expected to soften. Contribution from the Industrial Automation segment tends to be lumpy in nature and is dependent on the capital expenditure requirements of key customers. The Automotive segment could still be weighed down by the component shortage issues. 

The Semiconductor segment is anticipated to record stable revenue. We remain positive on the semiconductor industry but expect slower growth ahead. We are expecting the industry to grow at a slower CAGR of 5% in 2023-2025, vs the 8% CAGR for the 2020-2025 period.

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2H21 revenue vs 1H21

Higher StableLower
MedicalSemiconductorIndustrial Automation
Analytical Automotive

Source: Company, DBS Bank

Maintain BUY, TP: S$2.65. Overall, no change to our earnings estimate. Maintain BUY with TP of S$2.65, pegged to peers’ average of 15.5x on FY22F earnings. We like Frencken for its diversified portfolio of product offerings, which provide a stable source of earnings, strengthening its value proposition among peers.