Analysts cut Frencken's target prices on lower 1QFY2023 earnings

Revenue was down because of industry down cycle but costs increased

Analysts have trimmed their respective target prices for Frencken Group E28 following lower 1QFY2023 earnings.

For the three months to March, the manufacturer reported earnings of $5.2 million, down 59.5% y-o-y, while revenue was down 13% to $172.5 million.

The drop was largely due to the semiconductor industry's down cycle. In addition, costs and depreciation increased.

"The weakness expected for 1HFY2023 could extend to the second half of the year," writes DBS Group Research's Ling Lee Keng in her May 23 note.

"Overall, we expect a much weaker FY23F vs. FY22, and a recovery in 2024," states Ling, who has kept her "hold" call but with a reduced target price of 78 cents, which is pegged to 11x forward FY2024 earnings. Her previous target price was $1.09.

In his May 22 note, CGS-CIMB's William Tng describes Frencken as suffering from a "revenue/cost mismatch" for 1QFY2023, which caused net margin to decrease by 3.5 percentage points to 3%.

Tng notes that Frencken is still investing in additional capacity to help customers build new supply chains.

As such costs will remain higher in the interim, writes Tng, who has maintained his "hold" call but cut his target price from $1.05 to 87 cents.

In addition, given the challenging outlook, Tng believes that margins could remain pressured into FY2025, compelling him to cut his FY2023 and FY2025 earnings forecast by 20.3% and 54%.

Any earnings recovery in the nearer term will hinge on the timing of the recovery of the semiconductor sector.

Tng expects Frencken's earnings for FY2023 to drop by 59% over FY2022.

Maybank Securities' Jarick Seet is more optimistic.

He believes that the worst is over for Frencken and that its share price, already trading a below book value of 93 cents per share, has already priced in most of the bad news.

"We believe a rebound is possible in 2024 and it is well-positioned to take advantage of this rebound when it happens," writes Seet in his May 22 note.

"We believe the subsequent quarters should pick up at a slow pace, but at the same time signaling the worst might be over," states Seet, who has a "buy" call but has similarly cut his target price.

From $1.15 previously, he now sees Frencken as worth 94 cents.

UOB Kay Hian's John Cheong, on his part, has kept his "hold" call and has also cut his target price to 78 cents from $1.08.

The new target price is pegged to a higher valuation multiple of 13x current year earnings versus 10x previously.

In his May 23 note, Cheong explains the increase in his PE multiple is to capture Frencken’s earnings cycle, which is approaching a trough, and improvement in earnings quality where the medical and analytical & life sciences segments could see more contributions.

"Also, we note that Frencken has a diverse stream of revenue sources, which could help the company remain more resilient amid a volatile macro environment," states Cheong.


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