He writes: “In view of the market re-rating and our positive outlook, we now peg the stock to 17 times FY2025 price-to-earnings ratio (P/E), in line with peers’ forward P/E and 1.5 standard deviation (s.d.) above its historical mean forward P/E.”
Revenue growth was driven by the group’s mechatronics division, which grew 19% y-o-y to $389 million, offset by an 8.4% y-o-y decline in the integrated manufacturing services (IMS) division to $41 million.
Within the mechatronics division, growth in semiconductor revenue continued to be the main driver, at 38% y-o-y to $216 million.
Yeo writes: “It saw a rebound in sales in its Asia operations and booked stable sales from a key European customer. There was demand recovery in Asia, as well as better sell-through from a broader product portfolio.”
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Meanwhile, revenue from the medical and analytical life sciences segments were largely stable, at $64 million and $87 million respectively. The medical segment had higher customer orders, while the analytical life sciences business saw lower customer demand in Europe.
The industrial automation segment grew 20% y-o-y from increased orders by its key data storage customer while the IMS division’s revenue decline was affected by lower automotive and industrial electronics segment sales.
As a whole, Frencken’s gross profit margin in the 1HFY2025 was lower at 14.1% from 14.8% in the same period last year due to higher costs in Europe. With this, Yeo makes no changes to his forecasts, as the group’s revenue and earnings performance were in-line with his expectations.
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He writes: “We believe growth over the immediate term will be led by a semiconductor sector recovery. Frencken has guided for sales of its semiconductor, medical and automotive segments to remain stable in 2HFY2025 from 1HFY2025, followed by lower sales for analytical life sciences and higher sales outlook for its industrial automation segment.”
Key risks noted by him include the worsening trade war affecting consumer sentiment, and economic slowdown, weaker demand for Frencken's customer’s products and foreign exchange (forex).fluctuation risk.
Similar to Yeo, DBS Group Research’s (DBS) Ling Lee Keng has kept her “buy” call at a higher target price of $2.03 from $1.48 previously.
“We maintain our positive view on the semiconductor industry. The uptrend is expected to remain intact, however growth momentum could be slower, as pickings are likely to be harder after the low-hanging fruits dwindle,” writes Ling, who adds that the stock also benefits from the Monetary Authority of Singapore’s (MAS) equity market development plan (EQDP).
She continues: “Recent market sentiment has been cautious, reflecting downward revisions to industry and company forecasts. Despite the slower growth momentum, recovery should be more stable, standing on two legs — artificial intelligence (AI) and broader market recovery.”
Frencken is also investing in new facilities in the US and Singapore to “capture structural growth” across its key segments, notes Ling, with its upcoming facility, slated for completion in the 1QFY2027 to expand capacity, drive innovation and enhance competitiveness, particularly in semiconductors, life sciences, and aerospace.
On Frencken’s net margins, she notes that the group has undergone a few rounds of optimisation exercises over the last few years to achieve a leaner structure.
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She notes that to improve margins, the group is collaborating with customers to replace legacy programmes with new product introductions (NPIs) and identify higher value opportunities by leveraging its core competencies.
“We continue to expect the margin recovery to be sustainable. Net margin has been on an uptrend since hitting a trough in 1QFY2023,” adds Ling.
While still positive, analyst Yik Ban Chong of PhillipCapital offers the most conservative view, with his “buy” call and unchained target price of $1.76. He notes that Frencken’s outlook for its semiconductor segment is “more muted” due to potential order volatility from its customers.
“A key USA-based semiconductor equipment customer expects revenue and earnings to be down q-o-q in 3QFY2025 due to non-linear demand from leading-edge customers,” writes Yik.
However, he is “still optimistic” about the demand for advanced chip equipment over the next two years, noting that hyperscalers are more optimistic in their capital expenditure (capex) guidance for AI infrastructure including AI chips and sovereign demand is rising as well.
On Frencken’s medical and industrial automation segments, Yik believes the higher customer orders will continue in the 2HFY2025, following stable guidance from the group’s management.
Despite this, the analyst is bearish on the group’s net margins. “Analytical life sciences revenue also decreased by 6% y-o-y because of lower customer demand in Europe amid uncertain market conditions, which we believe will persist going into 2HFY2025,” writes Yik.
As at 1.46pm, shares in Frencken are trading two cents lower or 1.40% down at $1.41.
