Improving outlook for 1H22
- FY21 results below due to weaker margins
- Semiconductor division was the key contributor; Automotive affected by supply chain bottlenecks
- All divisions to register at least stable revenue in 1H22 vs 2H21; higher revenue from Semiconductor, Industrial Automotive and Automotive
- Maintain BUY with lower TP of S$2.09 on 8% to 10% cut in earnings, and lower valuation pegged to peers
Investment Thesis
A strong set of results despite supply chain disruptions, though margins a tad weaker than expected. Margins in FY21 were weaker, mainly due to supply chain disruptions affecting all segments, especially Automotive division. Despite this, the group was still able to register 38% higher net profit.
Semiconductor to remain key contributor; Automotive improving. The Semiconductor division remains the star performer, delivering the strongest growth in revenue for FY21 at 55.6% y-o-y, accounting for 38% of group revenue, up from 30% in FY20. Going forward, we continue to expect strong performance from this segment, riding on the robust growth of the semiconductor industry. With the supply chain bottlenecks likely to ease in 2022, we expect better performance for the Automotive division.
Valuation
Maintain BUY with lower TP of S$2.09. We cut earnings by 10%/8%, mainly on lower margin assumption of 17% for FY22F and 17.5% for FY23F, from 18% previously. Target price is also reduced to S$2.09 (previously S$2.65) pegged to a lower peers’ average of 13.5x (from 15.5x) on FY22F earnings, due to the de-rating of tech stocks globally.
Where we differ
We are optimistic that the positive impact on Frencken’s Semiconductor segment and the recovery in the Automotive division can more than offset the weaker Industrial Automation division.
Key Risks to Our View
Dependence on global market conditions. Frencken has exposure to customers in the US, European Union (EU), and Asia, so a global economic slowdown could impact demand and earnings.