Downgrade to HOLD as Short-term Risk Reward Turns Neutral

• Frencken (SGX:E28)'s 3Q21 PATMI of S$14.8m (+10.7% y-o-y) was in line. 9M21 PATMI accounted for 74% of our/consensus’ FY21E.
• We cut Frencken's FY21-23E EPS forecast by 1-6% to factor
  1. slower 4Q21 business momentum than we previously expected; and
  2. higher cost environment.

Frencken's 3Q21 Summary

• Frencken's 3Q21 revenue rose 18.7% y-o-y, driven by semicon (+42.7%), medical (+21.8%), analytical (+29%), and consumer electronics (+18.1%). These were offset by industrial automation (-17%) and automotive (-5.6%).
• Gross margin fell 0.5ppt y-o-y to 17.1% due to higher material and freight cost.

Frencken Expects 2H21 Revenue Stable H-o-h

• Frencken now expects 2H21 revenue to be stable h-o-h, from a “moderate increase” previously. In particular, the automotive segment is now expected to soften h-o-h from “stable”. Guidance for most other segments are unchanged, i.e. semiconductor (stable h-o-h), medical and analytical (higher h-o-h) and industrial automation (lower h-o-h).
• Frencken’s medical customer have recently blamed “chips and ships” for lowering guidance recently, and we suspect Frencken’s sales potential may have been capped there as well.

Still Positive for the Longer Run

• Our forecast reflects assumptions medical and analytical remain encouraging too.

• Key risk to our view is if supply chain for Frencken falls to S$2.50 (15.5x FY22E P/E), and we downgrade Frencken to HOLD as we believe risk-reward is now balanced. Prefer AEM (SGX:AWX) and UMS (SGX:558) for exposure for Singapore tech.
• UMS Holdings - Maybank Kim Eng 2021-11-15: Preparing For Growth.

Source: Maybank Kim Eng Research - 16 Nov 2021