FY23 a beat, thanks to a strong 4Q23
- FY23 revenue was 5.1% above our expectation and 3.2% above Bloomberg consensus’.
- FY23 net profit was 25.8%/24.1% above our/Bloomberg consensus expectations as Frencken did well in 4Q23, posting a S$13.3m net profit.
- Reiterate Add, higher TP of S$1.70 as we expect its gross profit margin to return to the 15.0% level in FY24F after having eroded to 13.2% in FY23.
Ended FY23 with a strong fourth quarter
Frencken reported net profit of S$5.2m-7.1m for 1Q23-3Q23 but surprised us with S$13.3m net profit for 4Q23, leading to its FY23 net profit coming in at 25.8%/24.1% above our/ Bloomberg consensus expectations. The better 4Q23 performance was led by a 13.9% qoq improvement in its semicon segment revenue (as some customers pulled in their FY24F orders into 4Q23), leading to gross profit margin at the group level recovering to 15.24% in 4Q23 vs. 12.30-12.40% in 1Q23-3Q23. Higher other income (higher project income of S$2.3m, revaluation gain of S$1.4m on financial assets) and cost controls in 4Q23 also aided FY23 results. FY23 revenue was 5.1%/3.2% above our/Bloomberg consensus’ expectations as the semicon segment did better, driven by stronger demand from front-end customers. As expected, a final DPS of 2.28 Scts (FY22: 3.64 Scts) was declared.
Management expects 1H24F revenue to be comparable to 2H23
In its FY23 results release, management guided that it expects 1H24F revenue to be stable compared with 2H23 (S$391.8m). In terms of its 1H24F segmental revenue performance vs. 2H23, management expects higher revenue for its semicon and medical segments, stable revenue for its analytical & life sciences and automotive segments; and lower revenue for its industrial automation segment.
Reiterate Add, as semicon segment drives net profit recovery
We reiterate our Add call on Frencken as we believe it is seeing the early stages of order recovery among its semicon customers, which should lead to a potential resumption in double-digit core EPS growth in FY24-26F. Given the recovery in its revenue and gross profit margin, we raise our FY24-25F revenue forecasts by 2.0-3.1% and increase our gross profit margin forecasts by 0.10-0.90% pt, leading to 7.6-13.4% increase in our core EPS forecasts for FY24-25F. Given the faster net profit recovery, we also raise our target P/E multiple on our FY25F EPS forecast to 14.1x (0.5 s.d. above its 5-year average) from 12.2x P/E previously (its 5-year average P/E), leading to a higher S$1.70 TP (previously S$1.37). Potential re-rating catalysts: faster recovery in its semicon business segment driven by new end consumer products, better cost controls, and greater concessions from customers on cost pass-throughs. Downside risks: further cost escalations affecting its net profit negatively, and further weakening in demand for its semicon business segment.
