Not Expecting Any Surprises In 4Q21
We do not anticipate any surprises in Frencken’s upcoming 4Q21 results. Our net profit estimate of S$14m (+33.2% yoy, -5.4% qoq) is derived from a revenue of S$175m, which implies a 7.6% yoy growth and an 11% qoq slowdown due to seasonality. Leading indicator worldwide chip sales continue to be robust, supporting our thesis that the semiconductor segment will drive positive operating leverage in 2021-23. Maintain BUY with a reduced target price of S$2.06.
WHAT’S NEW
• Not expecting anomalies in upcoming 4Q21. We do not anticipate any surprises in the upcoming 4Q21 results for Frencken Group (Frencken), which are expected to be released in the last week of February. Our net profit estimate of S$14m (+33.2% yoy, -5.4% qoq) is derived from revenue of S$175m, which implies a 7.6% yoy growth and an 11% qoq slowdown due to seasonality effects. For 9M21, Frencken reported earnings of S$46.1m (+43.7% yoy), taking net profit to 77% of our full-year estimate. The strong performance was led primarily by the semiconductor segment, which helped drive positive operating leverage.
• Worldwide chip sales continue to be robust. As at 11M21, global chip sales have grown 25.3% yoy to US$501.8b, and were on track to meet the estimate of US$553b (+25.6% yoy) in 2021, according to World Semiconductor Trade Statistics (WSTS). The semiconductor market overall was not negatively impacted by the COVID-19 pandemic in 2021, with robust customer demand due to secular growth drivers including 5G, Internet of Things (IoT) and artificial intelligence. For 2022, WSTS is projecting a growth rate of 8.8% to US$601b for the global semiconductor market.
• Semiconductor segment to remain the key growth driver in 2021 and 2022. Specific to Frencken, we expect the relatively more profitable semiconductor segment to contribute 39% and 40% of revenue for 2021 and 2022, an increase from 30% in 2020 (9M21: 37.2%). This should help lift overall gross profit margin from 17.0% in 2020 to our estimate of 17.4% in 2021 (9M21: 17.3%) and 2022, driving net profit growth by 41% and 11.7% in 2021 and 2022 respectively due to positive operating leverage. Further, our channel checks suggest indicative demand from Frencken’s clients still points towards continued growth going into 2022, suggesting that pricing environment for the components manufactured by Frencken
will remain healthy
STOCK IMPACT
• Near-term demand for semiconductor components to remain strong. The ongoing chip shortage bodes well for Frencken’s key semiconductor customers, who are mainly in the business of manufacturing equipment to make semiconductor chips. Current indications and outlook of these customers are still pointing towards a continuation of the uptrend, which is likely to be sustained into 2022.
EARNINGS REVISION/RISK
• No changes to our forecasts.
VALUATION/RECOMMENDATION
• Maintain BUY with lowered target price of S$2.06 (from S$2.62). We have reduced our valuation peg from 16.7x to 13.1x 2022F PE, from the initial 20% discount to key clients of Frencken to the stock’s historical +1SD PE range. As reference, the new valuation peg translates to a 28% discount to Frencken’s key clients. A more conservative stance is taken amid expectations of higher interest rates moving forward, impacting growth stocks generally. Despite that, we are still of the view that the current PE valuation of 10.7x for Frencken is attractive relative to peers due to its superior earnings growth profile, with EPS CAGR estimated at 24% over 2020-23.
SHARE PRICE CATALYST
• Higher-than-expected factory utilisation rates.
• Better-than-expected cost management.