• Maintain BUY, new SGD1.80 TP from SGD1.45, 19% upside. We turn more positive on Frencken Group after 2H23 earnings showed a continued sequential improvement, supporting our earnings recovery thesis. A stronger 2H23 led to FY23 earnings outperforming our estimates by 18% on recovering semiconductor orders and outlook. We raise FY24F-25F earnings by 9-11% and lift our TP higher ahead of an anticipated recovery – both this year and next year – and pegging the stock to a loftier +1.5SD target P/E of 16x from 14x at +1SD previously.

• FY23 beats our forecast. A strong recovery in 2H23 helped FY23 earnings (SGD32m; -37% YoY) outperform our forecast (SGD28m) by 18%. 2H23 revenue of SGD392m (-1.3% YoY) was dragged by lower mechatronics (SGD343m; -1.5% YoY) and integrated manufacturing services or IMS divisions (SGD48m; -0.8% YoY) but supported by the semiconductor (SGD160m; +4.9% YoY) and analytical & life sciences (SGD89m; +24% YoY) segments within the mechatronics unit. An increase in key semiconductor customer orders helped drive the segment’s growth. This leads us to believe that an earnings recovery is underway and a more pronounced recovery will take place from FY24. FRKN declared a final dividend of 2.28 SGD cents, amounting to a 30% payout ratio.

• The semiconductor segment driving a more positive outlook. FY23 earnings have outperformed our estimates on order acceleration in the semiconductor segment. We expect improving revenue trends to continue, as FRKN’s key European customer continues to grow and expand into Asia. We believe this customer could be building up inventory for a near-term ramp-up over a number of systems and is ordering ahead as it needs some lead time ahead of its systems’ launches. In the longer term, FRKN 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. Other segments such as analytical & life sciences (customer diversification and strengthening supply chain into Asia) and automotive (expansion into intelligent city with radar antenna products) are expected to register a stable revenue outlook. Meanwhile, industrial automation is set to decrease, as the segment’s key customer there is not expected to undertake major capital expenditure. Given that FY23’s net profit has outperformed our forecasts, we raise our FY24F-25F earnings by 9-11%, led largely by stronger revenue and recovery the semiconductor segment. We have also imputed better margins in anticipation of the semiconductor recovery going forward.

• Key downside risks to our forecasts include A later-than-expected demand recovery, which willl pose downside risks to our forecasts and TP. As FRKN’s 3.0 ESG score is below our 3.1 country median, we apply a 2% discount to its intrinsic value to derive our TP.

Source: RHB Research - 29 Mar 2024