Frencken Group Limited (FRKN SP) - UOB Kay Hian 2018-05-11: 1Q18 Results In Line, Broad-based Improvements Ahead

Frencken Group Limited (FRKN SP) - UOB Kay Hian 2018-05-11: 1q18: Results In Line, Broad-based Improvements Ahead FRENCKEN GROUP LIMITED SGX: E28

Frencken Group Limited (FRKN SP) - 1q18: Results In Line, Broad-based Improvements Ahead

  • Frencken Group Limited (Frencken)’s 1Q18 results are in line.
  • Despite the absence of revenue from a sold subsidiary, higher sales from Mechatronics offset reduced sales from IMS to deliver overall growth of 3.2% y-o-y. Stripping off 1Q17’s one-off disposal gain, attributable net profit grew 10.8% y-o-y.
  • As Frencken executes its strategies amid a positive macro background, we expect broad-based improvements in 2Q18.
  • Maintain BUY with an unchanged PE-based target price of S$0.79, implying 46.3% upside.



RESULTS

  • Strong 1Q18 results. Frencken Group Limited (Frencken) delivered a strong set of results with core net profit jumping 10.8% y-o-y to S$6.8m. Higher sales from Mechatronics (+19.3% y-o-y) offset reduced sales from IMS (-29.1% y-o-y) to deliver overall revenue growth of 3.2% y-o-y. Gross profit margin softened to 16.7% due to a shift in revenue contributions from the group’s business divisions.
  • Growth in Frencken’s major business segments. Management attributed higher sales to strong broad-based demand for mechatronics division business segments which made up for the reduced sales in automotive. The reduced sales in automotive was due to the sale of Precico Electronics Sdn. Bhd. (PESB). 
  • Excluding PESB’s revenue contribution in 1Q17, automotive sales in 1Q18 would have registered 11.7% growth y-o-y and group revenue in 1Q18 will have increased 15.4% y-o-y.


STOCK IMPACT

  • Europe’s confidence remains at elevated levels. Europe’s recovery after the crisis is now in full swing with 2018 real GDP growth expected to hit 2.3%, and business and consumer confidence remaining at elevated levels (Apr 18’s Europe Economic Sentiment Indicator was at 112.3 with the 1990-2017 average at 100). With the bulk of Frencken’s blue chip customers based in Europe, Frencken will be a strong proxy to the European economy which should see strong revenue growth.
  • Anticipating broad-based improvement in 2Q18. Riding on strong demand for its products, management expects to see broad-based growth across semiconductor, analytical, medical and automotive segments in 2Q18 while revenue for the industrial automation segment is expected to remain stable.
  • Mechatronics: Increasing its value-add to customers. The Mechatronics division’s operational strategy is to focus on increasing its value-add to customers by continuing to drive operational excellence initiatives and investing in state-of-the-art facilities and equipment. In 2018, the division intends to add new cleanroom facilities as well as equipment that will improve its high-precision machining capabilities and increase manufacturing automation.
  • IMS: Enhancing competencies, efficiency and margins. The IMS Division is working on several operational improvement initiatives aimed at enhancing its competencies, improving its efficiency and strengthening profit margins eg an “IMS Centre of Technology” in Johor to centralise its tool manufacturing capabilities for all its factories in Asia will be developed. In 2018, the division will be executing several programmes to increase the level of automation, implement lean manufacturing to reduce cost and wastage, and quicken its time-to-market.


EARNINGS REVISION / RISK

  • Risks include:
  1. drastic changes in macroeconomic environment,
  2. geography risk via its focus on European customers, and
  3. foreign currency fluctuations.


VALUATION/RECOMMENDATION

  • Maintain BUY with unchanged PE-based target price of S$0.79, implying 46.3% upside. Frencken trades at a significant discount to its manufacturing peers at 8.3x 2018F PE, which represents an undervalued contract manufacturer that will be exposed to Europe’s growth story.


SHARE PRICE CATALYST

  • Higher-than-expected demand for products.





Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-11
SGX Stock Analyst Report BUY Maintain BUY 0.790 Same 0.790



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