Brokers' take: Analysts maintain 'buy' for Frencken on semiconductor growth; DBS raises target price

DBS Group Research, Maybank Kim Eng and RHB have maintained "buy" on technology solutions provider Frencken Group after strong semiconductor growth, with DBS raising its target price to S$1.98, from S$1.55 previously. Maybank KE and RHB left target prices unchanged at S$1.74 and S$1.77 respectively.

In separate reports on Friday and Tuesday, analysts cited a strong Q1 2021 performance, driven by strong sales in the semiconductor, medical, analytical and automotive segments, though growth was partially offset by a softer industrial automation segment.

DBS analyst Ling Lee Keng said: "We like Frencken for its diversified portfolio of product offerings, which provides a stable source of earnings, strengthening its value proposition among peers."

The group posted a first-quarter net profit of S$14.7 million, up 54.7 per cent from S$9.5 million a year earlier. Ms Ling also noted that Frencken's gross profit margin has expanded by 1.7 percentage points to 17.3 per cent, year on year.

She added that Frencken's share price has rebounded from the low in March to reach a high in April, outperforming the FTSE ST Technology Index during the period.

Analysts agreed that the automotive segment will soften in the first half of 2021, compared to the previous half, due to chip shortages, but strong semiconductor momentum will likely mean that Frencken will still post a strong performance in H1.

Semiconductor sales recorded a 58 per cent increase year on year to S$65.9 million in Q1, contributing 36.4 per cent to total revenue.

Lai Gene Lih, an analyst at Maybank KE, said that the brokerage believes chip shortages creating production bottlenecks and capping growth momentum is a key risk, but that "chip shortages driving demand for both front-end and back-end equipment" would create semiconductor strength.

Maybank KE sees "stronger than expected semiconductor momentum to be a key upside driver".

RHB analyst Jarick Seet also acknowledged the strong growth of the medical segment, as Frencken receives larger medical orders related to computerised tomography (CT) scans and other imaging-related equipment.

"Its clients have also reduced their number of go-to manufacturers, and are making larger orders for existing and new products from their respective pools of retained product suppliers," Mr Seet said, adding that this would likely translate to higher margins as such orders ramp up over the year.

He added that there is "potential for earnings to spike, if its automotive and industrial automation divisions surprise on the upside, with new projects clinched".

DBS raised its earnings estimates for 2021 and 2022. RHB called Frencken one of its top sector picks, despite delays in a product launch from one of its customers, and added that a share price rerating is possible.