Brokers’ take: Analysts cut Frencken targets after Q1 results miss, expect 2024 recovery

ANALYSTS have lowered their target prices for Frencken Group after the semiconductor player’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’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 “hold”, while Maybank reiterated its “buy” 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’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’s FY2023 price-to-earnings ratio (PE), which is one standard deviation above its mean PE.  It also takes into account Frencken’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’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’s FY2024 PE, as the stock is now trading below its book value.  “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,” 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’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’ 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’s revenue.  Similarly, Maybank’s Seet believes a rebound is possible in 2024 and Frencken is well-positioned to take advantage of this rebound when it happens.