Felicia Tan Tue, Jun 21, 2022
RHB Group Research analyst Jarick Seet has upgraded Frencken to “buy” with an unchanged target price of $1.24 on attractive valuations.
“Over the past month, Frencken has corrected [around] 20% and is now trading at just 8.5x FY2022 P/E, an attractive valuation, which we consider represents a good entry for a long-term investment,” writes Seet in his June 21 report.
Seet had downgraded Frencken to “neutral” previously with a lowered P/E of 10x from 14x as Frencken’s NPAT growth would have been hampered due to higher costs along with the devaluation of tech stocks globally.
While Seet sees headwinds ahead for the counter, Frencken’s correction, which now puts its share price down some 60% from its peak, has factored in its muted margins and weaker automotive outlook.
To this end, Seet sees Frencken’s muted margins as likely to last for one to two quarters.
“Gross profit margins remain around 15.4% vs 17.3% a year ago, mainly due to higher prices of materials, freight and energy, and increased production overhead costs,” he writes.
“Depreciation also surged due to significant capital investments of $28.6 million during FY2021. These investments were done in relation to upgrading and expanding programs for the group’s global manufacturing facilities and the acquisition of Avimac in Singapore as part of its strategy to add space, capacity, and capability to generate sustainable growth,” he adds.
The way the analyst sees it, Frencken’s management is likely to pass on some of the costs to its customers, which could help improve margins.
“However, we expect these price increases to only flow in mostly during the 3QFY2022 and expect margins in the near term to remain muted at 15.3%-16.0% which would impact profitability,” he says.
The analyst is also fairly positive about the recovery of Frencken’s automotive segment. The segment fell 10.7% y-o-y to $19.3 million mainly due to one of Frencken’s key customers not being able to procure other key components to complete the products, which resulted in lower volumes ordered by the customer. “We understand that the customer is trying to mitigate this issue and expects orders to gradually recover in the next quarters,” says Seet.
To the analyst, key risks include a rise in material and overhead costs, and a downturn in semiconductor demand.
As at 11.12am, shares in Frencken are trading 3 cents higher or 2.80% up at $1.10.