Brokers' take: Maybank KE upgrades Frencken back to 'buy' on price correction

Michelle Zhu

Published Thu, Dec 2, 2021 · 07:09 AM

MAYBANK Kim Eng (Maybank KE) has reinstated its "buy" call on technology solutions provider Frencken Group E28 following its recent share price correction to S$2.12 as at the close on Dec 1, from its Nov 15 closing price of S$2.36.

Shares of Frencken were trading down by S$0.09 or 4.3 per cent at S$2.03 as at 2.24 pm on Thursday (Dec 2).

In a Dec 1 report, analyst Lai Gene Lih named Frencken and its mainboard-listed peers AEM Holdings and UMS Holdings as his preferred stocks for exposure to Singapore's tech sector.

Lai also remains "positive" on the overall sector on the view that demand dynamics remain "solid", but continues to be "incrementally selective" in response to supply-side bottlenecks. He believes Frencken, AEM and UMS face fewer supply-side bottlenecks than downstream players amid the global chip shortage.

With the upgrade, Frencken's target price has been left unchanged at S$2.50 and based on 15.5 times FY2022 price-to-earnings. This remains below the stock's former S$2.63 target before Maybank KE downgraded its call to "hold" from "buy" on Nov 16, as the brokerage had previously turned neutral on Frencken in the short term and cut FY2021 to FY2023 earnings per share estimates by 1 to 6 per cent.

AEM and UMS are also rated "buy" with the respective target prices of S$6.23 and S$1.71.

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"We remain optimistic that over time, Frencken's margins should trend upwards with new products with greater value add," said Lai in his latest report, although FY2022 to FY2023 net margin expansion assumptions are now "less aggressive to factor in some inefficiencies in passing costs along".

Noting that demand outlook among Frencken's customers remains robust, the analyst is forecasting the majority of supply chain shortfalls to spill over into FY2022.

While semiconductor bottlenecks remain unchanged, in his view, the analyst believes the shortage of materials has created bottlenecks for some of Frencken's customers, including ASML, Applied Materials and Lam in the latest financial quarter.

"However, all are actively resolving this, and Frencken is also adding capacity as well," Lai said.

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