FY24-25F outlook likely to improve
- We expect Frencken to issue its 3Q23 business update by after the market close on 27 Nov 2023.
- We estimate Frencken posting a S$176.8m revenue (-9.5% yoy, -1.0% qoq) and S$6.0m net profit (-45.1% yoy, -12.5% qoq) for 3Q23F.
- Our FY23-25F forecasts and P/E multiples are unchanged, but our TP is increased to S$1.37 on rollover to FY25F.
3Q23F net profit likely declined yoy and qoq
Taking reference from 2022 when Frencken released its 3Q22 business update after market close on 28 Nov 2022, we expect the company to release its 3Q23F business update by 27 Nov 2023. In our view, 3Q23F revenue likely fell by 9.5% yoy to S$176.8m, while net profit likely dropped by 45.1% yoy to S$6.0m.
Previously guided that 2H23F revenue could be similar to 1H23’s
In its 1H23 results release (14 Aug 2023), Frencken remained cautious on its FY23F outlook, expecting revenue to be stable in 2H23F versus 1H23. For 2H23F, Frencken has provided the following guidance for its segmental revenue: a) semiconductor segment to see higher revenue hoh; b) medical segment to register stable revenue hoh; c) analytical & life sciences segment revenue to increase hoh; d) industrial automation segment revenue to decrease hoh; and e) automotive segment revenue to stay stable hoh.
There are production outsourcing opportunities from Europe into Malaysia, in our view
Going into FY24-25F, we think Frencken’s customers’ inventories have been depleted and the company can expect more firm orders from these customers. In our view, compared to 1H23 when customers were not willing to accept components from Frencken due to their excess inventory situation, Frencken is now able to ship the components it is producing to customers. The Netherlands accounted for 27.2% of Frencken’s FY22 revenue. In our view, given the higher production costs in Europe and the difficulty in hiring workers, Frencken could benefit from production outsourcing opportunities from Europe into
Malaysia.
Reiterate Add with higher S$1.37 TP on rollover
We reiterate our Add call on Frencken as it seems to be seeing the early stages of recovery among its semicon customers, in our view, leading to a potential resumption in double-digit core EPS growth in FY24-25F. On rollover to FY25F, our TP is raised to S$1.37 (previously S$1.10) still based on an unchanged FY25F P/E of 12.2x (5-year [FY19-23F] average). Our FY23-25F forecasts are unchanged. Re-rating catalysts: a less severe slowdown in its semicon business segment, better cost controls, and greater concessions from customers on cost pass-throughs. Downside risks: further cost escalations affecting net profit negatively, and further weakening in demand for its semicon business segment.
