Brokers’ take: DBS upgrades Frencken to ‘buy’ on improving margins, outlook

DBS Group Research on Thursday (Nov 23) upgraded Frencken Group to “buy” from “hold” and raised its target price by 70.5 per cent to S$1.33 from S$0.78.

It said the semiconductor and machine manufacturer is poised for recovery, supported by a sound balance sheet and its diversified portfolio.

This comes as the research team expects the semiconductor industry to register “strong growth” in 2024 and 2025 following a weak 2023.

The semiconductor segment is the biggest contributor to Frencken, accounting for 40 per cent of its Q3 revenue, DBS noted.

DBS’ new target price of S$1.33 implies a potential upside of 17.7 per cent from the counter’s last trading price of S$1.13 as at the midday trading break. Frencken’s shares were up 4.6 per cent or S$0.05 at the time.

The target price is also pegged to 13 times DBS’ earnings estimates, slightly above the four-year average price-to-earnings (PE) ratio. This was up from 11 times previously, after accounting for a better outlook.

DBS has raised its FY2023 earnings forecast by 15 per cent and FY2024 by 43 per cent on higher margin assumptions. It assumed a net margin of 3.7 per cent for FY2023 and 5.5 per cent for FY2024, up from a respective 3.2 per cent and 4 per cent previously.

On Wednesday, Frencken posted a 35.1 per cent drop in third-quarter net profit to S$7.1 million from S$11 million in the same period last year.

Revenue was down 5.6 per cent year on year to S$184.4 million, with revenue for its semiconductor segment shedding 10.5 per cent to S$74.6 million.

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Increased sales in Europe from a key customer had proved insufficient to make up for the lower sales registered in Asia as a result of an industry slowdown, the group said.

The group’s Q3 results were in line with UOB Kay Hian’s expectations. The research team has maintained its “buy” recommendation on Frencken with a target price of S$1.23.

Frencken expects revenue to remain stable in H2 2023 with its semiconductor, medical, analytical and life sciences segments growing in revenue despite a forecasted drop in industrial automation revenue.

“Stable outlook for H2 2023 indicates that earnings have already bottomed in H1 2023, and it continues to focus on programmes for existing and new customers,” UOBKH said.

Its target price is 12.6 times the research team’s FY2024 earnings estimates and is one standard deviation above Frencken’s mean PE ratio to capture Frencken’s earnings cycle, which UOBKH said is approaching a trough.

There could also be an improvement in earnings quality where the medical, analytical and life sciences segments could experience more contributions.