• Tech stocks globally are still undergoing a de-rating and with a potential recession looming, we are mindful demand might suddenly taper off unexpectedly. As a result, we cut our FY22-23E earnings forecast for Frencken (SGX:E28) by 2-14% to factor in slower growth across certain segments and reduce our target multiple from 14x to 8.5x.
• Downgrade Frencken from BUY to HOLD with a lower target price due to the muted macro outlook.

Frencken's Semicon Segment Will Still Drive Growth in 2H22

• We expect Frencken's semi-con segment to continue to be one of the main drivers for 2H22E, along with the medical, analytical and life sciences segment. Automotive should also see a revival in 2H22 as compared to 1H22. However, Frencken's industrial automation will continue to decline as its major customer in the hard disk space has still not ramped up production for its new product.
• In addition, we think there is risk Frencken's semi-con segment, which enjoyed robust growth for the past few years, could potentially see growth tapering off, especially if the world enters into a recession.

Gradual Margin Recovery Likely

• Frencken suffered lower margins in 1H22 due to a rise in raw material prices as well as higher labour and production costs. It has managed to renegotiate better pricing terms for the newer contracts and as a result should enjoy better margins in 2H22E. However, the recovery of margins will be gradual as some of its existing contacts are still based on the older lower prices.

Risk: Demand May Drop Unexpectedly

• We feel that the outlook for Frencken is quite muted as compared to some of the other tech stocks in Singapore. As Frencken’s factories are largely based in Europe, it may suffer an unexpected drop in demand with a recession looming. As a result, its robust pipeline of orders may suffer a setback as other competitors did in the past.
• Frencken historically pays out 30% of earnings as dividends. We expect this trend to continue.

Source: Maybank Research - 30 Sep 2022