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Simons Trading Research

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

 

Frencken Group - 1Q22 Impacted by Mounting Cost Pressures & Automobile Disruptions

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  • Frencken’s weak 1Q22 earnings of S$12.8m (-12.6% y-o-y, +1.7% q-o-q) was impacted by rising cost pressures and disruptions in the automobile industry.
  • We believe the global automobile industry will continue to be plagued by an extended period of slow production due to the semiconductor chip shortage and prolonged Russia-Ukraine conflict, which would negatively impact Frencken’s automobile segment. We have lowered our target price for Frencken.

Frencken's 1Q22 Results

  • Growth across most but the automobile segment. Frencken (SGX:E28)’s 1Q22 revenue of S$198.4m (+9.3% y-o-y) was led by growth from the semiconductor (+15.5% y-o-y), analytical & life sciences (+16.7% y-o-y) and industrial automation segments, while sales in the medical segment remained relatively stable. However, the automobile segment (-10.7% y-o-y) was impacted by constrained customer demand as a result of:
    1. semiconductor chip supply chain challenges, and
    2. disruptions arising from the Russia-Ukraine conflict, which hosts assembly plants for automobile components ranging from electrical cables to catalytic converters and seatbelts.
  • Cost pressures mount. Gross margin narrowed in 1Q22 to 15.4% (1Q21: 17.3%, 4Q21: 15.3%), due to higher prices of raw materials, freight and energy. While Frencken’s manufacturing facilities were not impacted by the COVID-19-related lockdowns across China, those of its customers were, and finished products were unable to be shipped across.
  • Over the longer term, however, we believe Frencken is able to pass on a portion of the higher costs incurred to the customers.

2H22 to be Sequentially Better

  • Management is working to overheads for Frencken in the near term from increased depreciation expenses, as well as added overheads from acquisitions.

Frencken - Earnings Forecast Revision & Recommendation

  • No changes to our sources, which would help the company stand out amid a volatile macro environment.
  • Catalysts:
    • Higher-than-expected factory utilisation rates.
    • Better-than-expected cost management.

Source: UOB Kay Hian Research - 25 May 2022

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Labels: Frencken

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Chart Stock Name Last Change Volume 
Frencken 1.31 +0.06 (4.80%) 7,681,200 

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