RHB Investment Research Reports

Author: rhbinvest   |   Latest post: Fri, 1 Jul 2022, 10:02 AM


Frencken Group - Hit by Rising Cost Pressures

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  • Downgrade to NEUTRAL, from Buy, with a lower TP of SGD1.24 from SGD2.10, 5% upside. Frencken reported higher YoY revenue growth of 9.3% to SGD198.36m but NPAT declined 12.6% to SGD12.8m due to higher raw material, freight, and overhead costs. We cut our FY22F earnings by 17.5% to factor in lower margins. In addition, we also lowered our pegged TP P/E to 10x from 14x as NPAT growth will probably be hampered by higher costs, along with the devaluation of global tech stocks.
  • Margins likely to be muted in the near term. Gross profit margins remain around 15.4% as compared to 17.3% a year ago, mainly due to higher prices of materials, freight, energy, and increased production overheads costs. Depreciation also surged due to significant capital investments of around SGD28.6m during FY21. These were in relation to upgrading and expansion programs for the group’s global manufacturing facilities and the acquisition of Avimac Pte Ltd in Singapore as part of its strategy to add space, capacity, and capability to generate sustainable growth. Management will likely pass on some of these costs to their customers which may help to improve margins. However, we expect these to only flow in majority in 3Q22 and expect margins in the near term to remain muted at 15.3-16.0% which would impact profitability.
  • Semiconductors and analytical segments are still going strong but automotive declines. Semiconductors segment increased by 15.5% YoY to SGD76.1m, while analytical and life sciences are up 16.7% YoY to SGD38.9m and will likely continue to do so for the rest of FY22F. However, the automotive segment dropped 10.7% YoY to SGD19.3m mainly due to one of its key customers not being able to procure other key components to complete the products, resulting in lower volumes ordered by the customer. We understand that the particular customer is trying to mitigate this and expect orders to gradually recover in the following quarters ahead.
  • Headwinds ahead with muted margins. We expect margins for the next quarter to remain low as costs remains high while the company tries to pass on some costs to its customers. In addition, shortage on components impacting clients, especially in the automotive industry, will continue to be a dampener to orders from its automotive key client. As a result, we downgrade to NEUTRAL from Buy with a lower TP of SGD1.24, pegged to a 10x FY22F P/E, lower than the average five years peer’s multiple of 12x due to the negative growth ahead. Key risks include a rise in material costs and overhead costs, plus a downturn in semiconductors demand.
  • ESG. Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% discount to our TP.

Source: RHB Research - 23 May 2022

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Labels: Frencken

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Frencken 1.11 0.00 (0.00%) 1,273,500 

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