Brokers’ take: RHB upgrades Frencken to ‘buy’ on attractive valuation but maintains target price

RHB on Tuesday (Jun 21) bumped its rating on Frencken Group back up to “buy” from “neutral”, after it was trading at an “attractive valuation”, which RHB analyst Jarick Seet said represents a good entry for a long-term investment.

RHB had previously downgraded the mainboard-listed company to “neutral” on higher costs, which hampered net profit growth and the devaluation of global tech stocks.

“Over the past month, Frenken has corrected approximately 20 per cent and is now trading at just 8.5 times its FY2022F price-to-earnings (P/E) ratio,” said Seet.

The target price of S$1.24 remains unchanged. RHB expects gross profit margins to remain muted for the next 1 to 2 quarters, due to higher prices of materials, freight and energy, and increased production overhead costs.

Capital investments of S$28.6 million in FY2021 for upgrading and expanding of Frencken’s global manufacturing facilities and for the acquisition of Avimac in Singapore to generate growth have also resulted in a surge in depreciation, noted Seet.

He added that while the group will likely offset some of the costs by passing them on to consumers, the price increases will likely flow in during Q3 of 2022, and profitability is still expected to be dampened in the near term.

While semiconductor and analytical segments have seen year-on-year increases, these have been tempered by a downturn in the company’s automotive segment, attributed to lower order volumes by a key customer that was not able to procure other key components to complete its products.

Seet said: “We understand that the customer is trying to mitigate this issue and expects orders to gradually recover in the next quarters.

“Frencken has corrected close to 60 per cent from its peak and is now trading at 8.5 times FY22F P/E, which we do think has factored in the negative facts regarding muted margins and a weaker automotive outlook.”

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Shares of Frencken were up S$0.04 or 3.74 per cent at S$1.11 as at 10.48 am on Tuesday.