Simons Trading Research

Author: simonsg   |   Latest post: Mon, 8 Aug 2022, 9:09 AM


Frencken Group - 2Q21 Semiconductor Industry Component Shortage Spurring Growth

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  • Frencken’s 2Q21 results were a strong beat with earnings of S$16.6m (+80.2% y-o-y), bringing 1H21 net profit to 63% of our full-year estimate. Revenue for the semiconductor segment (+62.1%) was led by strong demand for front-and back-end equipment, contributing to positive operating leverage.
  • The strong demand outlook in the semiconductor segment is expected to remain through to 2022. Maintain BUY rating on Frencken and increase target price to S$2.52.

Frencken Reported Strong 1H21 Earnings; Accounts for 63% of Full-year Estimate

  • Frencken (SGX:E28)’s 2Q21 net profit of S$16.6m (+80.2% y-o-y, +13.3% q-o-q) brought 1H21 earnings to 63% of our 2021 estimate of S$49.9m. The beat was led by gross margin expansion, primarily driven by outperformance from the semiconductor segment. 2Q21 revenue jumped 36.6% y-o-y to S$193.8m (+6.7% q-o-q) from broad-based growth across the semiconductor (+62.1% y-o-y, +13.7% q-o-q), analytical (+52.2% y-o-y, +11.1% q-o-q) and automobile (+79.8% y-o-y, +0.7% q-o-q) segments, but was partially offset by slower sales in industrial automation (- 13.5% y-o-y, -13.3% q-o-q).
  • Scaling up from positive operating leverage. Frencken's 1H21 gross margin expanded to 17.4% (+1.9ppt y-o-y), while better-than-expected operational efficiencies helped uplift operating margin to 10.3% (+2.1ppt y-o-y). The latter was driven by Frencken’s ongoing focus on reducing operating excesses.
  • Positive m-o-mentum to continue into 2H21. The semiconductor segment is expected to maintain its m-o-mentum into 2H21, as indicated by management. Additionally, higher revenue indications are also anticipated from the medical and analytical segments, due to a growing customer base and resumption of orders following the onset of the COVID-19 pandemic. However, revenue from the industrial automation segment is expected to soften, while the automobile segment is expected to remain stable.

Stock Impact

  • Demand for semiconductor components to remain strong. The current chip cited that demand for equipment is likely to be sustained into 2022.

Earnings Revision / Risk

  • We raise our 2021 and 2022 for 2021 and 2022 have risen 20.5% and 20.3% to S$60.1m and S$67.1m respectively.

Valuation / Recommendation

  • Maintain BUY with a higher target key customers of 19.1x.
  • We believe Frencken’s valuation is supported by its strong forward earnings CAGR of 24% over 2020-23.

Share Price Catalyst

  • Higher-than-expected factory utilisation rates.
  • Better-than-expected cost management.

Source: UOB Kay Hian Research - 24 Aug 2021

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Labels: Frencken

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Frencken 1.31 +0.06 (4.80%) 7,681,200 

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