CGSI lowers Frencken&rsquo s target price to $1.15 on tariff-induced uncertainties

Between Apr 4 and 7, Frencken Group non-executive non-independent chairman Gooi Soon Chai increased his total interest from 23.65 per cent to 23.73 per cent. This involved the acquisition of 300,000 shares at an average price of S$0.948 apiece, in addition to 40,000 shares acquired by Sinn Hin Company.

 

Gooi was appointed as director in February 2015 and as group chairman in August 2016. With 30 years in the global technology industry, he is currently senior vice-president of Keysight Technologies and president of Keysight&rsquo s order fulfilment and digital software solutions group.

 

Frencken president and executive director Dennis Au acquired 100,000 shares at S$0.985 apiece on Apr 4. Au was appointed president of the group in May 2015 and executive director in April 2016, and is responsible for strategic direction, global operations and performance. He also serves as CEO of the mechatronics division, overseeing business development in Europe, Asia and the US.

 

UOB Kay Hian analyst John Cheong is maintaining his &ldquo buy' ' call on Frencken Group E28 0.00% (FRKN) at a raised target price of $1.23 from $1 previously, following an improvement in semiconductor fab equipment spending and the recent increase in revenue guidance by its key customers.

 

Cheong pegs his target price to 12.6x FY2024 P/E, based on 1 standard deviation (s.d.) above mean P/E. 

 

&ldquo The +1 s.d. in our PE multiple peg is to capture Frencken&rsquo s earnings cycle, which is approaching a trough, and improvement in earnings quality where the medical as well as analytical and life sciences segments could see more contributions.&rdquo

 

He adds: &ldquo Also, we note that Frencken has a diverse stream of revenue sources, which could help the company remain resilient amid a volatile macro environment.&rdquo

 

Frencken&rsquo s semiconductor segment, its biggest, contributed to around 40% of FY2022 earnings and is expected to perform better h-o-h from 2HFY2023 onwards, based on the group&rsquo s revenue guidance.

 

Furthermore, two of Frencken&rsquo s largest semiconductor customers have raised their revenue guidance in their latest results.

 

The first, ASML, has raised its FY2023 y-o-y revenue guidance up from 25% to 30% in its 2QFY2023 results, and expects a 3QFY2023 of EUR 6.8 billion ($9.8 billion), or a y-o-y growth of 17%. ASML has highlighted that the overall demand for its systems continues to be strong, resulting in record bookings in 3QFY2023 of around EUR 8.9 billion.

 

Meanwhile, Frencken&rsquo s second largest semiconductor customer, Applied Materials (AMAT), reported earnings that beat analysts&rsquo estimates in August. AMAT has also guided for earnings in 3QFY2023 that was 10% above analysts were earlier projecting, thanks to stronger demand from AI-related chips and rising orders from customers in China who are looking to increase purchases of equipment that are capable of older manufacturing processes.

 

On the right track

 

The semiconductor industry is cheering itself on for a brighter outlook. In its Sept 12 quarterly report, Semiconductor Equipment and Materials International (SEMI) reported that although global fab equipment spending for front-end facilities is expected to decline 15% y-o-y in FY2023 , it will rebound 15% y-o-y in FY2024.

 

In his Oct 10 report, Cheong expects next year&rsquo s spending recovery to come about following the end of the inventory correction this year, as well as a strengthening demand for semiconductors in the high-performance computing (HPC) and memory segments. 

 

&ldquo The trend suggests that the semiconductor industry is turning the corner and on a path back to growth,&rdquo writes the analyst.

 

Frencken&rsquo s stable outlook for 2HFY2023 is encouraging as well, as earnings have already bottomed in 1HFY2023 and there looks to be potential for more new business for the group, more so in Asia than in Europe, especially in Malaysia.

 

The group is guiding for higher revenue in 2HFY2023 versus 1HFY2023 for the semiconductor as well as its analytical and life sciences segments. It expects lower revenue between this period for the industrial automation segment and last but not least, comparable revenue for the medical and automobile segments.

 

Cheong has raised his FY2024 and FY2025 earnings forecasts by 17% and 8% after increasing his revenue estimates by 5% to account for the improved revenue outlook by Frencken&rsquo s key customers. &ldquo We also raised our gross margin assumptions by 0.5% and 0.1% respectively to account for better operating leverage from higher revenue.&rdquo

 

Share price catalysts noted by the analyst include the higher-than-expected factory utilisation rates and better cost management.

 

Meanwhile, Cheong remains upbeat about the company&rsquo s long term growth prospects, given its long-standing ties with customers as well as its healthy balance sheet. &ldquo This will ensure that it is well-positioned to capitalise on a recovery in the global economy and technology sector,&rdquo he says.