Brokers’ take: RHB downgrades Frencken to ‘neutral’ on lacklustre FY2022 outlook

RHB on Tuesday (Aug 16) downgraded its call on integrated manufacturer Frencken Group from “buy” to “neutral”, with the company expected to remain under pressure for the rest of 2022.

While Frencken’s revenue for H1 ended June rose 3.6 per cent to S$388.9 million, its earnings declined by 16.6 per cent to S$26.1 million on higher costs. Analyst Jarick Seet believes that its performance in FY2022 may worsen.

“Our downgrade is premised on the fact that the stock’s closing price is now close to our target price (of S$1.24), and the company’s outlook is somewhat lacklustre,” he said. Frencken was trading at S$1.18, down 0.8 per cent or S$0.01, as at 10.02 am on Tuesday.

Frencken has recently started preparations on its sites and production facilities in Europe, Malaysia and Singapore to cater for future business growth. This will increase costs, Seet noted. At the same time, he expects Frencken’s revenue growth to remain muted until FY2023, as many new projects will only ramp up after new facilities are ready and qualified.

“(Revenue) from the increased capacity will likely only flow in from FY2023 onwards. As a result, we expect net margins to still remain muted in FY2022,” said Seet.

There should be more clarity on Frencken’s expansion plans by the end of Q3 or in Q4, and until then, Seet reckons that investors can “focus on other stocks in the same sector to yield more returns”.

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That said, he is still optimistic that Frencken can perform better once its expansion plans are completed, with FY2022 just “a temporary blip in its long-term outlook”.

Frencken’s management thinks that margins bottomed in H1 and will likely strengthen in the subsequent quarters, as new contracts and purchase orders with higher prices replace the existing, lower-margin ones, Seet noted.

He added that the company continues to see growth in the semiconductor, medical, life sciences and automotive segments, with the latter likely to rebound after a weak H1.