• Maintain BUY, new SGD1.71 TP from SGD1.81, 25% upside. We maintain our positive stance on Frencken Group even though 1H24’s results were slower than expected. Nonetheless, we see FRKN as a beneficiary of the anticipated semiconductor recovery going forward. We also expect revenue to continue strengthening on the back of demand recovery and inventory levels in the supply chain coming down going into FY25. The stock trades at c.12x FY25F earnings P/E, ie near its historical mean average.

• 1H24 slower than expected. 1H24 revenue grew 6.2% YoY to SGD373m while earnings surged 50% YoY to SGD18m on the back of recovering topline and better gross margins. Revenue growth was mainly driven by the mechatronics division, which grew by 8% YoY to SGD327m, offset by the integrated manufacturing services (IMS) division’s 4% YoY revenue decline to SGD44m. The mechatronics unit’s semiconductor segment (+27.8%; SGD156m) saw increased orders from a key customer in Europe and recovery in sales from Asia operations. Meanwhile, the medical and analytical & life science segments grew by 5% and 13% YoY to SGD62m and SGD91m. The industrial automation segment declined by 60% YoY to SGD14m. The IMS division’s automotive segment’s revenue decline (-9% YoY; SGD32m) was mitigated by the consumer and industrial electronics business’ revenue growth (+13% YoY; SGD10m). Gross margin rose by 2.5ppts to 14.8% from better operating leverage. EBIT grew 42% YoY to SGD26m on better gross margins and opex.

• FY24F earnings change (-11.6%). with FY25 and FY26F earnings cut by 7.6% each. Both revenue and margins in 1H24 have come in lower than expected. Although recovery continues to be in play, it is slower than the pace which we have anticipated. Hence, we lower our revenue estimates in view of a slower-than-expected recovery. We also lower our margin assumptions, as higher value programmes may take more time to kick in, affecting the pace of our previous recovery expectations. In spite of our earnings cut, we still see a better 2H24 and FY25, driven by a recovery in customer orders going forward.

• Semiconductor segment to drive growth. We see earnings growth outlook mainly driven by the semiconductor segment, where inventory levels in the supply chain continue to come down, with overall demand gradually improving first from the front end. In line with our earnings revision, our 16x P/E-based TP is reduced to SGD1.71. The 5% reduction is smaller than our earnings cut, as we roll over our earnings base from FY24F P/E to blended FY24F-25F.

• Key downside risks to our forecasts and TP include a later-than-expected demand recovery. 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 new SGD1.71 TP.

Source: RHB Research - 26 Aug 2024