• Frencken’s 3Q21 earnings of S$14.8m (+10.7% y-o-y, -10.8% q-o-q) took 9M21 net profit to 77% of our full-year estimate. The business update presented no surprises, as revenue continued to be led by a positive momentum in the semiconductor segment, driving improved operating leverage.
• We expect the semiconductor segment to continue driving growth going forward, driven by the accelerating development of 5G technology. Maintain BUY.

Frencken's 3Q21 Net Profit in Line With Expectations

• In its business update, Frencken (SGX:E28) reported headline 3Q21 earnings of S$14.8m (+10.7% y-o-y, -10.8% q-o-q), taking 9M21 net profit to 77% of our full-year estimate. 3Q21 revenue of S$196.5m (+18.7% y-o-y) was in line with its previous guidance; growth was led by the semiconductor (+42.7%), analytical (+29.0%) and medical (+21.8%) segments, which were offset partially by declines in the industrial automation (-17.0%) and automobile (-5.6%) segments.
• For the quarter, gross margin eased 0.5ppt y-o-y and q-o-q to 17.1% due to expected increases in material and freight costs. This brought 9M21 gross margin to 17.3%, largely in line with our estimates of 17.4% for 2021.

Structural Growth Drivers in the Semiconductor Sector Intact

• Frencken remains in a good indicative demand from clients points towards continued growth going into 2022.

Near-term Demand for Semiconductor Components to Remain Strong

• The current chip of the secular uptrend, which is likely to be sustained into 2022.

Gross Margin Uplift Towards 17.4%

• This compares with the 15.2-16.9% range in 2016-19, with the increase attributable to the higher share of the more profitable semiconductor segment from 16% in 2016 to an estimated 40% in 2022 (2020: 30%). Additionally, the ongoing group-wide cost-cutting measures and efficiency improvements such as upgrading of equipment and facilities are expected to improve operating margins, further bolstering bottom-line.

Valuation & Recommendation

• No changes to supported by its strong earnings growth profile, with EPS CAGR estimated at 24% over 2020-23.

• Catalysts:
  • Higher-than-expected factory utilisation rates.
  • Better-than-expected cost management.

Source: UOB Kay Hian Research - 18 Nov 2021