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Maybank raises TP to $1.34 on Frencken on strong outlook, CGSI lowers TP to $1.48 on lower FY2024 margins

Douglas Toh
Douglas Toh • 4 min read
Maybank raises TP to $1.34 on Frencken on strong outlook, CGSI lowers TP to $1.48 on lower FY2024 margins
Channel checks by Seet have led the analyst to believe Frencken is benefitting from more orders from its European customers. Photo: Frencken
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Maybank Securities analyst Jarick Seet has kept his “buy” call on Frencken Group at a raised target price (TP) of $1.34 from $1.10 previously, highlighting that the stock remains his top pick in Singapore’s tech space.

The analyst’s new TP is based on a blended 12 times FY2025/FY2026 price-to-earnings ratio (P/E) instead of a 12 times FY2025 P/E, to standardise his valuation methodology across Singapore’s semiconductor players.

He writes: “We expect orders to increase by 30% from this customer in 1HFY2025 and 2HFY2025 will likely be dependent on orders from its American customer. As a result, we believe the outlook for 1HFY2025 to be stronger than we initially expected and will likely benefit more if the highly anticipated semi-con recovery happens in 2HFY2025.”

Frencken’s management has indicated an expectation for its semiconductor sales to increase in the 1HFY2025 from 2HFY2024, particularly in Asia, while the group will also continue to gain more wallet share of its key customers in the front-end equipment sector. 

On this, Seet writes: “From our channel checks, we believe Frencken is benefitting from more orders from its European customers and we expect sales from this customer to increase by 30% in 1HFY2025.”

He adds: “For 2HFY2025, we expect semi-con sales to fare much better along with the expected semi-con uplift, but we may have to wait until April and May for more clarity.”

See also: Brokers’ Digest: Pan-United, Frencken, China Aviation Oil, Seatrium, Centurion, ISDN

The group is also considering a $40 million to $60 million expansion of its production resources in Singapore to increase efficiency, capacity and capabilities, especially as one of its key semiconductor customers is also expanding in Singapore. 

Seet writes: “In the US, a new facility will be inaugurated in 1HFY2025. This will expand the US operation’s production capacity to support growth of the existing business and to capitalise on future opportunities.”

He concludes: “We continue to like Frencken and believe it will remain a key beneficiary of the recovery of the semi-conductor industry. However, with the ongoing macro uncertainty and Trump’s tariffs, we believe customer demand may be impacted.”

See also: UOBKH lowers TP for Delfi by 3% to 82 cents after earnings missed expectations

Upsides noted by the analyst include stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products and improving efficiencies and finally, improving institutional interest, which could help the stock re-rate towards peers’ valuations. 

Conversely, downsides include a drop in demand, supply chain disruptions that impede Frencken’s production ability and revenue recognition and lastly, a lower-than-expected dividend pay-out.

Meanwhile, although CGS International (CGSI) analyst Alfie Yeo has similarly maintained his “buy” call on the stock, his TP has been reduced to $1.48 from $1.71 previously, on the FY2024’s lower margins.

For the period, Frencken’s revenue and profit after tax and minority interests (patmi) for the period, which grew 7% y-o-y to $794 million and 14% y-o-y to $37 million respectively, thanks to revenue growth in its mechatronics and medical and analytical and life science dvisions.

The 14.5% in gross profit margin due to operating leverage however, and net margin of 4.7% did not meet Yeo’s expectations.

He writes: “Although Frencken showed revenue and earnings growth, 2HFY2024 h-o-h acceleration, and margin improvement in FY2024, the results trailed our expectation. While revenue exceeded our forecast by 3%, net profit and earnings before interests andtaxes (ebit) were below our expectations by around 15% due to lower-than-expected margins.”

“While revenue exceeded our forecast by 3%, net profit and ebit were below our expectations by around 15% due to lower-than-expected margins. Margin recovery had not been as fast as we anticipated due to operating expense and lower gross margins,” adds Yeo.

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With this, the analyst has now reclaibrated his margin forecast to the current run rate, which results in a 13% reduction to FY2025 and FY2026 earnings. 

Going forward, he expects revenue growth to be more positive, led by continued recovery in the semiconductor segment, with order momentum from customers continuing to build up into 2025.

“That has led us to raise our FY2025 and FY2026 revenue by 3% each. Despite the net profit cut, we remain positive on earnings recovery going forward, albeit at a slower pace,” writes Yeo.

One key downside risk to his forecast and TP is a later-than-expected demand recovery.

Frencken Group closed flat at $1.07.

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