“We continue to like Frencken and believe it will remain a key beneficiary of the semi-con recovery. It remains our top pick in the Singapore tech sector,” writes Seet.
The analyst also believes that the group’s profitability could even surge beyond his already bullish forecast.
Following this, he has pegged his target price to a higher 15x FY2024 price-to-earnings ratio (P/E).
“We raise our FY2420/FY2025 patmi estimates by 2.0% and 2.2% respectively,” continues Seet.
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Meanwhile, the analyst also understands that Frencken’s semi-con segment recovery will also be driven by the growth of its key customer in Europe, who has begun moving production of a new programme from Europe to Southeast Asia (SE Asia).
He adds: “Moreover, it will continue to deepen its strategic partnership with its key customer in SE Asia to achieve a broader revenue base. And it will expand its portfolio of build-up wafer fab equipment.”
“We expect 1QFY2024 to be better than 1QFY2023 and also subsequent FY2024 quarters to be stronger q-o-q, mainly due to new net profit interests (NPI)s, in the semi-con, automotive, life science and medical sectors,” writes Seet.
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He continues: “Margins should also continue to pick up due to higher operating leverage. SE Asia utilisation has picked up to 60% to 70% as compared to 50% in 3QFY2023, which is highly encouraging and should point to a stronger 1QFY2024 y-o-y.”
Upside factors noted by Seet include stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products and improving efficiencies, and lastly, improving institutional interest, which could help the stock re-rate towards peers’ valuations.
Conversely, downside factors include a drop in demand, supply chain disruptions that impede Frencken’s production ability and revenue recognition, and a lower-than-expected dividend pay-out.
Meanwhile, DBS analyst Lee Keng Ling echoes a similar sentiment, also raising her estimates.
She writes: “We now assume slightly higher net margins of 5.7% and 6.0% respectively for FY2024F/FY2025, up from 5.5% and 5.9% previously, as we expect net margin to be on a recovery path after reaching a trough of 3% in 1QFY2023.”
Her target price is also pegged to a higher P/E of 17x, which is nearly 1.5 standard deviation (s.d.) higher from its four-year average.
Although Lee also understands Frencken to see a greater recovery in its semi-con segment for FY2024, she notes that its industrial automation segment, however, is still expected to be weak, as it is dependent on a key customer in the data storage space.
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Key risks noted by her include the group’s dependence on global market conditions. With its exposure to customers in the US, Europe and Asia, a broad global economic slowdown could impact demand and earnings.
Lastly, RHB analyst Alfie Yeo has raised his FY2024 to FY2025 earnings by 9% to 11%, as well as pegging the stock to a loftier 1.5 standard deviation (s.d.) target P/E of 16x from 14x at 1 s.d. previously.
Similarly, Yeo notes that the semicon segment continues to exhibit robust growth.
He writes: "FY2023 earnings have outperformed our estimates on order acceleration in the semiconductor segment."
He adds: "In the longer term, Frencken also has a new semiconductor customer that is supporting its utilisation in Asia. Additionally, a positive revenue outlook will be supported by the medical segment, in our view, where topline is also set to increase on more robust customer orders."
As at 4.55 pm, shares in Frencken are trading at seven cents higher or 4.61% up at $1.59.
