Overcoming short-term challenges
? Frencken’s margin profile could improve in 2H22F as new orders reflect the
current cost environment and the company’s efforts to reduce costs bear fruit.
? We think there remains opportunities for Frencken to increase its wallet share
with customers in its semicon business segment.
? Reiterate Add with a slightly lower TP on margin adjustments.
Margin pressure could be alleviated in 2H22F
In 1Q22, Frencken’s GPM/NPM were 15.4%/6.5%, versus 17.2%/8.1% in 1Q21, mainly
due to higher raw material prices, higher cost to mitigate supply chain disruptions, and
higher operating costs from inflation. We expect the 1Q22 margin pressure to continue into
2Q22F but improve in 2H22F. Management has guided that new orders from customers
will reflect the current cost environment and its internal efforts to lower operating expenses
will also help defend/improve 2H22F margins. For the automotive segment, the backlog
arising from supply chain disruptions in 1H22F could help 2H22F performance as
production resumes momentum.
Growth opportunity in the semicon segment
We see good growth prospects for Frencken in its semicon business segment (38% of
1Q22 group revenue). Frencken has expanded its cleanroom facilities in Europe, Malaysia,
Singapore, and the US, while new and larger premises in the Netherlands, Malaysia, and
Singapore are expected by management to be completed in 1H22F. Frencken also
commented that it can now produce larger (2-3m parts; previously 1m) parts and has also
moved up the value chain to do higher level module assembly to an entire chamber for its
customer’s end products.
Downturn opportunities
Frencken had a net cash position of S$72.8m at end-Mar 22. In a recessionary
environment, we think Frencken could keep a look out for complementary M&A. In Sep21, Frencken acquired Singapore-incorporated Avimac Pte Ltd for S$14m and in Jan 22,
the company acquired Malaysia-incorporated Penchem Technologies Sdn Bhd.
TP lowered slightly; reiterate Add on earnings growth prospects
We cut FY22-23F GPM by 0.25-0.40% pts reflecting 2Q22F margin pressure before
recovery in 2H22F leading to 2.8-4.8% decreases in our EPS forecasts. We reiterate Add
but our TP is lowered to S$1.72 (previously S$1.77) given the earnings cut. This is based
on 11.2x (+1 s.d. P/E multiple over Jan 17 to Jun 22) of our FY23F EPS forecast. We
previously applied a P/E multiple of 11.2x (FY23F sector average). Downside risks are
potential production disruptions arising from Covid-19 infections in its workforce and further
cost pressures from higher raw material costs. A mean reversion to Frencken’s average
forward P/E multiple of 7.9x over Jan 17 to Jun 22 on our FY23F EPS forecast leads to a
potential valuation of S$1.21.