Results Analysis: Recovery intact
- FY23 results above expectations; Europe’s robust sales partially cushioned weaker sales in Asia
- Quarterly net margin continued to see improvement; expected to hover around 5-6% range going forward
- Stable to positive guidance for most segments; semiconductor and medical segments to do well
- Earnings raised by 8-9% on higher margin assumptions; maintain BUY with high S$1.90 TP
FY23 results above expectations; Europe’s robust sales partially cushioned weaker sales in Asia. 2H23 revenue eased 1.3% y-o-y but rose 11.6% h-o-h to S$391.8m, mainly boosted by higher sales in the semiconductor and analytical & life sciences segments. Net profit saw a 20.7% decline but surged 69% h-o-h to S$20.4m. For FY23, Frencken reported net profit of S$32.5m (-37.4% y-o-y) following a 5.5% drop in revenue to S$742.9m, above our expectations. Higher sales from the semiconductor, medical and analytical & life sciences segments of its Europe operations helped offset lower sales in the industrial automation and semiconductor businesses of its Asia operations. A 2.28 Scts DPS was declared for FY23 compared to 3.64 Scts for FY22 (30% payout ratio).
Key segmental breakdown of FY23 revenue
| Segment | % contribution | S$m | Y-o-Y (%) |
| Semiconductor | 38.2 | 282.4 | (7.4) |
| Medical | 16.2 | 120.2 | 11.4 |
| Analytical & life sciences | 22.9 | 169.8 | 15.2 |
| Industrial automation | 8.1 | 60.1 | (45.2) |
| Automotive | 9.4 | 69.5 | (3.4) |
| Consumer & industrial electronics | 2.4 | 17.9 | 2.1 |
| Others | 2.7 | 23.0 | -14 |
| TOTAL | 100 | 742.9 | -5.9 |
Source: Company; DBS Bank
Quarterly net margin continued to see improvement.
Net margin in 4Q23 jumped to 6.4% (from 3.9% in 3Q23), a rebound from the low of 3.0% in 1Q23. For the full year, a net margin of 4.4% was still lower than FY22’s 6.6%, due to lower revenue, inflationary cost pressures, and increased depreciation expenses from capital investments to upgrade and expand the group’s global manufacturing facilities. Moving forward, we expect net margins to hover around the 5-6% range.
Source: DBS Bank; Company
Well positioned for recovery, supported by a sound balance sheet and diversified portfolio. The semiconductor segment is Frencken’s biggest contributor, accounting for 38% of FY23 revenue. We expect the semiconductor industry to register strong growth in 2024 and 2025 following a weak 2023. Semiconductor revenue dipped 10.9% y-o-y in 2023 after a flat 2022 and is expected to recover with a strong gain of 16.8% in 2024 and 15.5% in 2025, according to Gartner. Global semiconductor shipments in Nov ‘23 showed further improvement from Feb ‘23’s low. SEMI expects the rebound in 2024 to continue through 2026, with wafer shipments setting new highs as silicon demand increases to support AI, HPC, 5G, automotive, and industrial applications.
Stable to positive guidance for most segments. The group is guiding for higher revenue for the semiconductor and medical segments for 1H24 compared to 2H23. The industrial automation division, however, is still expected to be weak, as it is dependent on a key customer in the data storage space. Revenue for the automotive and analytical & life sciences divisions are expected to be stable.
Guidance for 1H24 revenue vs. 2H23
| Segment | Current guidance |
| Semiconductor | Higher |
| Medical | Higher |
| Analytical & life sciences | Stable |
| Industrial automation | Lower |
| Automotive | Stable |
Source: Company, DBS Bank Ltd
Earnings raised by 8% to 9% on higher margin assumptions, maintain BUY with high S$1.90 TP. Given the improving outlook, coupled with a stable recovery in margins, we have raised FY24F/FY35F earnings by 8-9%. We now assume slightly higher net margins of 5.7%/6.0% for FY24F/FY25F, up from 5.5%/5.9% previously, as we expect net margin to be on a recovery path after reaching a trough of 3% in 1Q23. Our TP is raised to S$1.90 (previously: S$1.60), pegged to a higher PE of 17x, near +1.5SD from its four-year average, up from 15.7x (+1SD) previously. Maintain BUY