1Q22 miss due to lower-than-expected margins
1Q22 PATMI of SGD12.8m (-12.6% YoY) fell short of our and consensus
estimates, reaching only c.19% of our full-year forecast, due to lower-than-expected margins. We cut F22-23E earnings by 18-21% to factor in
higher costs. Lowering TP by 27% to SGD1.80 as we reduce our target
multiple from 15.5x FY22E P/E to 14x amid cost headwinds (SG peers
trading at 13.7x). Retain BUY as we believe Frencken’s multi-year growth
story of value-add via new products across several customers is intact.
Semicon and analytical drove 1Q22 sales growth
1Q22 revenue rose 9.3% YoY to SGD198.3m, on the back of growth from
semicon (+15.5% YoY), analytical (+16.7% YoY) and industrial (+8.7% YoY).
Automotive fell 11% YoY due to chip shortages. Net margin fell 1.6ppt YoY
to 6.5% due to higher costs (e.g. materials, freight and energy etc,) as well
as higher depreciation following SGD28.6m capex in FY21.
Impact of supply chain pressure might ease in 2H22
Cost pressures from supply chain challenges may potentially ease in 2H22
as Frencken may be able to pass on higher costs on to customers. Some of
Frencken’s automotive customers in China were unable to take delivery of
products due to disruptions caused by Covid-19. Easing of these should
help revenue and margins too. Notwithstanding, we assume FY22E net
margin of 6.3% (vs. 6.5% in 4Q21-1Q22) to account for risks of worsening
further supply chain challenges.
Maintains optimistic outlook
Management maintains an optimistic outlook for long-term growth due to
value-add and strong execution with existing blue-chip customers. For
instance, the acquisition of Avimac provides Frencken with large-format
machining capacity and capability, and it is an important enabler for the
full system assembly for an equipment that is now in new product
introduction phase (Frencken has traditionally worked with components
and modules). Frencken expects 1H22 semiconductor and analytical
segments to post higher revenue HoH. It expects automotive to show
marginal improvement HoH, industrial automation to be stable HoH, and
medical to be lower HoH. Key risk remains further supply chain pressure.