1Q22: Impacted By Mounting Cost Pressures And Automobile Disruptions
Frencken’s weak 1Q22 earnings of S$12.8m (-12.6% yoy, +1.7% qoq) was impacted by
rising cost pressures and disruptions in the automobile industry. We believe the global
automobile industry will continue to be plagued by an extended period of slow
production due to the semiconductor chip shortage and prolonged Russia-Ukraine
conflict, which would negatively impact Frencken’s automobile segment. We have
lowered our target price to S$1.63 (from S$2.06). Maintain BUY.
RESULTS
• Growth across most but the automobile segment. Frencken Group’s (Frencken) 1Q22
revenue of S$198.4m (+9.3% yoy) was led by growth from the semiconductor (+15.5% yoy),
analytical & life sciences (+16.7% yoy) and industrial automation segments, while sales in
the medical segment remained relatively stable. However, the automobile segment (-10.7%
yoy) was impacted by constrained customer demand as a result of: a) semiconductor chip
supply chain challenges, and b) disruptions arising from the Russia-Ukraine conflict, which
hosts assembly plants for automobile components ranging from electrical cables to catalytic
converters and seatbelts.
• Cost pressures mount. Gross margin narrowed in 1Q22 to 15.4% (1Q21: 17.3%, 4Q21:
15.3%), due to higher prices of raw materials, freight and energy. While Frencken’s
manufacturing facilities were not impacted by the COVID-19-related lockdowns across
China, those of its customers were, and finished products were unable to be shipped across.
Over the longer term, however, we believe Frencken is able to pass on a portion of the
higher costs incurred to the customers.
• 2H22 to be sequentially better. Management is working to mitigate cost inflation pressures
through operational initiatives and is anticipating signs of easing in 2H22. On the outlook for
1H22 relative to 2H21 (hoh basis), we expect growth in the semiconductor, analytical & life
sciences and automobile segments, stable performance in the industrial automation
segment, and lower revenue in the medical segment.
STOCK IMPACT
• Continued growth in the semiconductor segment to buffer automobile slowdown. We
expect the semiconductor sub-segment to contribute 39% of 2022 revenue, an increase from
38% in 2021 (2020: 30%). The relatively more profitable semiconductor segment is
anticipated to help bolster a sufficient buffer for the group amid the volatile period that the
automobile industry is undergoing.
• Continuing investments for longer-term growth. For 2022, a similar amount of
investment has been set aside for growth capex and acquisitions (2021: S$33.9m). Frencken
has earmarked capex to add manufacturing capacity to facilitate upgrades and expansion
programmes across its plants in Europe, Malaysia and Singapore. This would imply higher
overheads for Frencken in the near term from increased depreciation expenses, as well as
added overheads from acquisitions.
EARNINGS REVISION/RISK
• No changes to our forecasts.
VALUATION/RECOMMENDATION
• Maintain BUY with lower target price of S$1.63 (previously S$2.06). From a previous
valuation peg of 13.1x (+1SD to historical mean), we have adjusted our valuation peg to
10.4x 2022F PE, or Frencken’s historical mean PE range, as we believe the global
automobile industry will face an extended period of slow production amid adjustments in the
global supply chain. We maintain the view that the current forward PE valuation of 6.9x for
Frencken is attractive due to its diverse stream of revenue sources, which would help the
company stand out amid a volatile macro environment.
SHARE PRICE CATALYST
• Higher-than-expected factory utilisation rates.
• Better-than-expected cost management.