Hot stock: Frencken down as much as 10.3% after release of Q1 results

SHARES of Frencken Group fell in the morning trading session on Thursday (May 19), after it posted a 12.6 per cent decline in its first-quarter net profit.

The counter traded as low as S$1.13 as at 1.22 pm, down 10.3 per cent or S$0.13.

No married deals were recorded, according to ShareInvestor data.

The stock price recovered slightly to S$1.14 as at 4.15 pm, down S$0.12 or 9.5 per cent. The counter was actively traded, with 10 million shares worth S$11.6 million changing hands. It ended the day S$0.11 or 8.7 per cent lower at $1.15.

In a business update on Tuesday, the mainboard-listed technology-solutions provider said its net profit fell 12.6 per cent year on year to S$12.8 million in Q1 due to higher costs and heightened supply-chain challenges in the second half of FY2021.

Meanwhile, revenue was up 9.3 per cent on year to S$198.4 million, driven primarily by double-digit sales of the group’s mechatronics division. DBS Group Research on Thursday downgraded its call on Frencken to “hold” from “buy”, and lowered its target price to S$1.36 from S$2.09 on weak margins.  

Anticipating margin pressures to persist in the near term, analyst Ling Lee Keng reduced her earnings projections for FY2022 and FY2023 by about 20 per cent each.

“In the past few years, Frencken has demonstrated its ability to improve net margins from the various operational initiatives in place, including a rationalisation exercise and improvement in productivity,” said Ling. CGS-CIMB on Wednesday also cut its target price to S$1.77 from S$2.06, as it reduced its earnings per share (EPS) forecast to factor in inflationary cost pressures reflected in Q1 2022 margins. It maintained an “add” call on the counter.  The brokerage adjusted down its EPS forecasts by 8.3 per cent in FY2022 and 14.3 per cent in FY2024 by varying its gross profit margin assumptions.

It also reduced its gross profit margin assumptions to factor in inflationary cost pressures, although it expects Frencken can pass on costs and move some of its business to projects that can provide better margins. Maybank lowered its target price to S$1.80 from S$2.47, and maintained its “buy” call on the counter, in a report on Wednesday. 

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Frencken Q1 net profit dips 12.6 per cent on higher costs

Analyst Lai Gene Lih now expects Frencken will trade at 14 times the brokerage’s estimates for FY2022 earnings amid cost headwinds, instead of his original target multiple of 15.5 times.

However, he believes that cost pressures from supply-chain challenges may potentially ease in the second half of the year if Frencken decides to pass on higher costs to customers.

The easing of Covid-19 measures in China should also benefit revenue and margins too, said Lai.