Brokers’ take: Analysts downgrade Frencken after Q3 earnings miss

CGS-CIMB and Maybank Securities downgraded their call on Frencken Group : E28 0% after the integrated technology solutions provider missed both research houses’ revenue and net profit forecasts in Q3.

The results miss was largely due to a slower-than-expected recovery in its automotive business segment; a weaker euro versus the Singapore dollar; and a one-time inventory write-down amounting to some S$2.4 million, noted CGS-CIMB on Monday (Nov 28).

The brokerage’s downgrade to “reduce” from “add” came on the back of Frencken’s challenging business environment comprising geopolitical tensions, supply constraints, rising interest rates and cost pressures.

CGS-CIMB said it expects Frencken’s business environment to only recover from the second half of FY2023.

“Potential de-rating catalysts are further cost escalation affecting net profit negatively and further weakening of demand in its semiconductor business segment,” it cautioned. 

Commenting on the group’s latest set of Q3 financials, CGS-CIMB noted that Frencken’s European operations in the latest quarter were affected by rising business costs due to higher energy processes, a labour crunch and higher wages.

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“Although the group negotiated to pass on some of the cost increases to its customers, the pace of cost increases continued post-consultation with its customers,” remarked its analysts.

The research house reduced its FY2022 to FY2024 revenue forecasts by 5.7 to 7.7 per cent, leading to 11.2 to 17.3 per cent cuts to its earnings per share (EPS) forecasts. It retained its valuation based on Frencken’s 10-year average price-to-earnings ratio of 7.4 times on its FY2023 EPS projections, versus 7.5 times as at Oct 17.

This resulted in a lower target price of S$0.95 compared with S$1.12 previously.

Meanwhile, Maybank downgraded its call on the stock to “sell” from “hold”, citing rising costs.

The research house on Tuesday said it expects Frencken’s net margins to decline further in the future.

Its target price was revised down slightly to S$1.02 from S$1.05 to account for 6.9 per cent and 5.9 per cent lower profit after tax and minority interests estimates for FY2022 and FY2023, respectively.

“New orders secured in the medical, analytical and life sciences segments will help to buffer any slowdown in the semiconductor segment but rising costs in Europe may continue to hamper Frencken’s margins and growth,” noted Maybank analyst Jarick Seet.

“We expect continued cost increases to further hamper margins and potentially even new orders, especially as winter is approaching.”

While DBS Group Research is anticipating a slight improvement in the group’s margins from Q4 from a low base in the latest quarter, it expects near-term weaknesses to continue for the semiconductor segment.

“Industrial automation could still be affected by customers cutting capex (capital expenditures), while the supply chain challenges and inflationary cost pressures continue to plague the automotive division,” observed DBS analyst Ling Lee Keng on Tuesday.

Ling however flagged potential improvements for the analytical and life science and medical segments, supported by an order backlog and new product initiatives.

DBS maintained its “hold” call on the stock while trimming earnings by 6 per cent for FY2022 and by 7 per cent for FY2023.

Its target price was, however, raised to S$1.06 from S$0.95 as the brokerage attributed a slightly higher valuation multiple of eight times price-to-earnings versus seven times previously – assuming Q3 is “the low point” for its margins.

“Overall, we could still expect a slight improvement in margins going forward from the low seen in Q3 FY2022. We project net margins of 6.4 to 6.7 per cent for FY2022 to FY2023, from 7.7 per cent in FY2021,” said Ling.

Shares of Frencken were trading S$0.06 or 5.4 per cent lower at S$1.05 as at 9.37 am on Tuesday.