BROKERAGES are curtailing their valuations and earnings estimates for Frencken Group after the Feb 24 release of its FY2021 results, where the mainboard-listed manufacturer saw its net profit rise 38 per cent on year and raised its recommended dividend to S$0.0413 per share.

Both RHB Research and DBS Group Research have cut their price targets to S$2.10 from S$2.64 and to S$2.09 from S$2.65, respectively, while maintaining "buy" calls on the stock.

In a report on Thursday (Mar 3), RHB analyst Jarick Seet said the new S$2.10 target is pegged to a lower 14 times FY2022 price-to-earnings (P/E) ratio versus 16 times previously as he sees the group's FY2022 growth slowing down on a year-on-year basis.

Seet nonetheless remains positive on the group's long-term prospects given its expanded production capabilities and capacity through recent acquisitions, as well as higher revenue growth projected for the industrial automation and automotive segments.

"As global companies are still spending heavily on capex and the chip shortage is still ongoing, we expect the semiconductor sector to continue being robust. Strong demand from this sector should continue to benefit Frencken positively until H1 FY2022, before softening in H2," said Seet.

On the other hand, DBS's reduced price target is pegged to a lower peer average of 13.5 times FY2022 earnings estimates compared to 15.5 times previously, due to the de-rating of tech stocks globally.

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The research house has cut its earnings estimates for FY2022 by 10 per cent and FY2023 by 8 per cent after lowering margin assumptions, noting that Frencken's FY2021 results missed its projections due to weaker half-on-half margins amid softer sales in the automotive segment.

Its analyst Ling Lee Keng continues to expect the group's semiconductor segment to remain a strong performer going forward.

"With the supply chain bottlenecks likely to ease in 2022, we expect better performance for the automotive division," said Ling in a Feb 25 report.

Meanwhile, CGS-CIMB lowered its target marginally by S$0.01 to S$2.06 and continues to rate Frencken at "add".

The research house's slightly lower price target is based on a new P/E multiple of 11.66 times compared to the earlier S$2.07 target pegged to a P/E multiple of 11.44 times.

In a report dated Feb 28, its analyst William Tng said the new valuation continues to factor in a 10 per cent premium to the 2023 sector average P/E multiple, which is now 10.6 times as opposed to 10.4 times on Jan 28.

He has assumed higher operating expenses in view of cost pressures, andadjusted FY2022 to FY2023 earnings per share estimates down by 2.04 to 3.25 per cent.

"Key risks are potential production disruptions arising from Covid-19 infections in its workforce and further cost pressures from higher raw material costs," noted Tng.

Shares of Frecken were trading S$0.01 or 0.6 per cent higher at S$1.63 as at 10.42 am on Thursday.

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