Brokers’ take: Analysts mixed after Frencken’s cautious revenue outlook

FRENCKEN Group : E28 0%’s weaker topline outlook has prompted UOB Kay Hian (UOBKH) to downgrade its call on the stock to “hold” from “buy” while lowering its price target to S$1.08 compared to S$1.36.

Meanwhile, CGS-CIMB upgraded its rating to “hold” from “reduce”, and lifted its target to S$1.05 from S$0.95 on higher valuations.

The opposing moves of both brokerages come after the technology solutions company’s management cautioned about softer H1 FY2023 revenue, citing an expected slowdown across most of the group’s key segments amid a challenging macroeconomic environment.

Specifically, Frencken has guided for lower revenue in its semiconductor, medical, and industrial automation segments.

The group is expecting revenue growth from its analytical and life sciences segment, and stable income from the automobile business.

UOBKH reduced its earnings forecasts for FY2023 by 19 per cent, and by 21 per cent for FY2024 upon lowering its revenue estimates to reflect the latest management outlook.

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Its revised target price reflects a 10 times price-to-earnings multiple based on FY2023 estimates.

While Frencken’s FY2022 earnings beat UOBKH’s estimates due to better net margins, analyst John Cheong observed that revenue growth was only marginal, with the group’s segments showing mixed revenue performance.

He however believes the group’s long-term growth will stand to benefit from its segment diversity along with new programmes secured from customers in the group’s various segments.

“We note that Frencken has a diverse stream of revenue sources, which could help the company remain more resilient amid a volatile macro environment,” he said on Wednesday (Mar 1).

“With its global footprint, expanded capacity and capability to manufacture products with sub-micron accuracy, Frencken has successfully secured new programmes from a leading instrumentation company in the analytical and life-sciences segment. It has also been winning new programmes from customers in the medical segment,” he added.

Though CGS-CIMB also pared its FY2023 to FY2024 revenue forecasts to result in 10 per cent to 14.8 per cent lower earnings per share (EPS) forecasts for the period, the research house now values Frencken higher upon rolling over its estimates to FY2024.

Its upgrade on the stock is premised on the view that some of Frencken’s current earnings downsides have already been priced in. There is also potential for EPS growth to resume in FY2024, said CGS-CIMB analysts on Tuesday.

The research house’s new target price is based on 8.5 times the stock’s five-year average price-to-earnings ratio, versus the previous 7.5 times multiple.

Shares of Frencken were trading S$0.035 or 3.4 per cent lower at S$1.00 as at 11.30 am on Wednesday.