1Q22 Miss Due to Lower-than-expected Margins

• Frencken (SGX:E28)'s 1Q22 PATMI of S$12.8m (-12.6% y-o-y) fell short of our and consensus estimates, reaching only ~19% of our full-year forecast, due to lower-than-expected margins.

Semicon and Analytical Drove 1Q22 Sales Growth

• Frencken's 1Q22 revenue rose 9.3% y-o-y to S$198.3m, on the back of growth from semicon (+15.5% y-o-y), analytical (+16.7% y-o-y) and industrial (+8.7% y-o-y). Automotive fell 11% y-o-y due to chip shortages.
• Net margin fell 1.6ppt y-o-y to 6.5% due to higher costs (e.g. materials, freight and energy etc,) as well as higher depreciation following S$28.6m capex in FY21.

Impact of Supply Chain Pressure Might Ease in 2H22

• Cost pressures from supply chain challenges may potentially ease in 2H22 as Frencken may be able to pass on higher costs on to customers. Some of Frencken’s automotive customers in China were unable to take delivery of products due to disruptions caused by COVID-19. Easing of these should help revenue and margins too.
• Notwithstanding, we assume FY22E net margin of 6.3% (vs. 6.5% in 4Q21-1Q22) to account for risks of worsening further supply chain challenges.

Maintains Optimistic Outlook

• Frencken's management maintains an optimistic products across several customers is intact.
• Key risk remains further supply chain pressure.

Source: Maybank Research - 18 May 2022