Strong Semi Momentum Drives 1H21 Beat for Frencken; BUY

• Frencken (SGX:E28)'s 1H21 PATMI rose 67.2% y-o-y to S$31.3m, surpassing our and consensus’ estimates. This was driven by stronger-than-expected semicon momentum and robust recovery in automotive.
• We raise FY21-23E EPS by 6-15%, and our target price is now based on 15.5x FY22E P/E (from 14.5x FY21E) as we believe:
  • cyclicality risks have moderated; and
  • margin expansion trend remains on track.
• We believe key risk is components shortages worsening in the various supply chains Frencken is exposed to.
• Maintain BUY.

Automotive Segment Drove Frencken's Margin Expansion in 1H21

• Frencken's 1H21 revenue rose 28.3% y-o-y to S$375.3m, largely on the back of semicon (+60.2% y-o-y) and automotive (+40.3% y-o-y) strength. Frencken registered growth with all semicon customers, from the front-end to the back-end. Medical (+11.5% y-o-y) benefitted from the return of elective surgeries, while Analytical (+29.4%) recovered as a key customer’s products saw a rebound following some challenges last year.
• On the recovery of the automotive segment, gross margin expanded by 1.9ppt y-o-y to 17.4% on the recovery of the automotive segment, while the integrated manufacturing services segment margins swung 12.5ppt y-o-y to 11%.

Frencken's 2H21 Revenue Likely

• Frencken expects side tightness can be alleviated. Meanwhile, the medical and analytical segments are expected to enjoy sequential strength. Industrial automation (IA) should be softer h-o-h.

We See Reduced Cyclicality Risks for Frencken

• We raise FY21-23E EPS by reduced cyclicality as we expect semiconductor strength to be sustained in the next 1-2 years, while other end-markets continue their post-COVID-19 recovery.

• Key upside to our forecast is if there is lumpy capex from IA customer Seagate.

Source: Maybank Kim Eng Research - 16 Aug 2021