Maybank Research analyst Jarick Seet has maintained his &ldquo buy&rdquo rating for Frencken Group E28 0.00% with an unchanged target price of 94 cents, citing recent market support for artificial intelligence (AI).

 

Amid the recent AI craze following Nvidia&rsquo s forecast raise due to strong demand for its AI chips, Seet says that semiconductor-related stocks have &ldquo mostly rallied&rdquo , even in Singapore.

 

This bodes well for Frencken, which manufactures components and modules for various industries including the semiconductor, life sciences, automotive and industrial automation sectors.

 

The analyst&rsquo s channel checks show that orders have yet to be positively impacted but semiconductor inventory could be depleted faster if the trend persists. He believes that most of Frencken&rsquo s weak outlook for FY2023 have been priced in as one of the few semiconductor stocks trading below its net asset value (NAV) of 93 cents.

 

As a result, Seet has maintained his target price of 94 cents, pegged to a 9x FY2024 price-to-earnings ratio (P/E).

 

The analyst says that the inventory levels of key customers, especially in Singapore, will be vital to Frencken&rsquo s financial performance. In 1QFY2023, the company was impacted by low utilisation and excess capacity as its largest semiconductor customer in Asia reduced orders due to high inventory levels after a downturn, notes Seet.

 

Meanwhile, Frencken&rsquo s largest customer in Europe continues to perform well due to its &ldquo ample backlog orders&rdquo and longer lead times, he adds.

 

According to him, the company expects inventory levels to only normalise in 4QFY2023, although this could happen sooner if the strong demand for AI chips continues. &ldquo If this happens, Frencken will likely benefit as an increase in orders from its key customer would likely ramp up utilisation and allow it to enjoy the operating leverage it had in FY2022,&rdquo says Seet.

 

The analyst adds that Frencken is well-positioned to take advantage of a demand rebound when this eventually happens.

 

&ldquo We believe subsequent quarters should see a slow pick up, but at the same time signal the worst might be over,&rdquo says the analyst. &ldquo While signs of a sustainable rebound are still lacking, a persistent AI trend would greatly benefit the sector and will definitely be worth watching.&rdquo

 

Seet&rsquo s upside risks include stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products and improving efficiencies, as well as improving institutional interest, which could help the stock re-rate towards peers&rsquo valuations.

 

On the other hand, a drop in demand, supply chain disruptions that impede Frencken&rsquo s production ability and revenue recognition and a lower-than-expected dividend pay-out are risks on the downside.

 

ANALYSTS have lowered their target prices for Frencken Group : E28 -0.6%after the semiconductor player&rsquo s Q1 2023 results mostly missed expectations.

 

On Friday (May 19), Frencken reported a 59.5 per cent drop in net profit to S$5.2 million for the first quarter ended March. Revenue was down 13 per cent year on year at S$172.5 million, with lower contributions from the group&rsquo s mechatronics division.

 

In reports issued after the company posted its Q1 FY2023 earnings, research teams from DBS Group Research, UOB Kay Hian (UOBKH), CGS-CIMB and Maybank have maintained their calls on the counter, amid expectations of a recovery in 2024. 

 

DBS, UOBKH and CGS-CIMB maintained &ldquo hold&rdquo , while Maybank reiterated its &ldquo buy&rdquo call. All four, however, reduced their target prices, with DBS making the largest cut followed by UOBKH. 

 

DBS revised its target price to S$0.78, down 28.4 per cent from S$1.09 previously. This implies a potential downside of 6 per cent from Frencken&rsquo s last trading price of S$0.83 as at 12.45 pm on Tuesday. Shares of Frencken were trading 0.6 per cent or S$0.005 lower at the time.

 

UOBKH reduced its target price by 27.8 per cent to S$0.78 from S$1.08, also implying a potential downside of 6 per cent. The new target is 13 times the brokerage&rsquo s FY2023 price-to-earnings ratio (PE), which is one standard deviation above its mean PE. 

 

It also takes into account Frencken&rsquo s earnings cycle, which is approaching a trough, along with improvements in earnings quality as its medical segment as well as analytical and life sciences segment could see a rise in contributions. 

 

Maybank&rsquo s target was down to S$0.94 from S$1.15, implying a potential upside of 13.3 per cent. Its new target is nine times the research team&rsquo s FY2024 PE, as the stock is now trading below its book value. 

 

&ldquo We believe Frencken, which is trading at below its net asset value of S$0.9273 a share, has most negatives priced in already as the whole industry is facing excess inventory and undergoing a downturn,&rdquo said Maybank analyst Jarick Seet.

 

Meanwhile, CGS-CIMB revised its target price to S$0.87 from S$1.05, which implies a potential upside of 4.8 per cent. 

 

The research team believes margins could remain pressured over the FY2023 to FY2025 period. It has lowered its earnings per share forecasts by around 20.3 per cent to 54 per cent, and expects FY2023 net profit to fall 59 per cent year on year. 

 

Echoing the sentiment, DBS analyst Ling Lee Keng expects net margins to remain weak for the rest of 2023 as costs remain high and revenue takes time to ramp up. 

 

DBS also slashed its earnings estimates by 59 per cent for FY2023 and 50 per cent for FY2024, mainly to factor in much weaker margins. The research team now projects a net margin of 3.2 per cent for FY2023 and 4 per cent for FY2024. 

 

Against FY2022&rsquo s S$51.9 million, DBS expects FY2023 full-year net profit of S$22.4 million for Frencken, while UOBKH, CGS-CIMB and Maybank project S$25.6 million, S$21.4 million and S$22 million, respectively. 

 

Looking ahead, DBS&rsquo Ling expects a recovery in revenue and earnings in 2024, on the back of the anticipated recovery of the semiconductor industry, which accounts for the bulk of Frencken&rsquo s revenue. 

 

Similarly, Maybank&rsquo s Seet believes a rebound is possible in 2024 and Frencken is well-positioned to take advantage of this rebound when it happens.