PhillipCapital analyst Yik Ban Chong has in his July 11 report initiated coverage on semicon player Frencken Group (Frencken) with a &ldquo buy&rdquo call and a target price (TP) of $1.76, with a view that the company is now undervalued even as it is poised for clear growth ahead.

 

In the 1QFY2025 ended March, revenue in Frencken&rsquo s semiconductor segment grew 34% y-o-y from a strong rebound in sales from its Asia operations.

 

This was possibly due to its Netherlands-based customer broadening its product portfolio, conducting tests in Asia for lithography machines used to produce two nanometre (nm) chips.

 

In a sign of its growing confidence, the company is seen to double its capex this year.

 

The key initiative is a $63 million investment in a new manufacturing facility in Singapore due to be completed in the 1QFY2027.

 

As such, Chong believes the group is &ldquo well-positioned&rdquo to take on more products and processes from its customers&rsquo Asia expansion plans.

 

&ldquo The new facility has clean rooms with higher floor-to-ceiling heights, enabling Frencken to take on new programmes with key wafer fabrication equipment customers in the following years,&rdquo elaborates Chong.

 

To be sure, Frencken has benefited from its key semiconductor customers experiencing high revenue growth in the first quarter due to high demand for artificial intelligence (AI ) chips and leading-edge foundries&rsquo investments.

 

Industry giant Taiwan Semiconductor Manufacturing Company (TSMC) has maintained its guidance for 2025, with most of its capex budgeted for advanced process equipment.

 

All three equipment makers ASML, Applied Materials and Lam Research, have all provided positive revenue guidance of an average 18% y-o-y increase for the second quarter, driven by increased leading-edge foundry investments.

 

On this, Chong writes: &ldquo We expect Frencken to benefit from new products and processes used by its key semiconductor equipment customers for research and development (R& D), to advance both front-end and back-end semiconductor equipment.&rdquo

 

The analyst also sees that the group has attractive valuations when compared to its listed peers.

 

Frencken is trading at 13 times FY2025 price-to-earnings ratio (P/E), a 35% discount compared to its local peers&rsquo average valuations of around 20 times FY2025 P/E.

 

&ldquo We believe Frencken is undervalued because of strong manufacturing capabilities for its key customers in Asia, high customer demand for testing new products,and low exposure to direct impact from tariff, with shipments to the US making up about 9% of FY2024 revenue,&rdquo writes Chong.