FRENCKEN GROUP LIMITED (SGX:E28)
Frencken Group - Valuation & Diversification Play
- Improvement in 1Q19 revenue and profit vs 1Q18; inline.
- Industrial automation, analytical and medical segments to drive growth in 2Q19.
- Semiconductor still weak while automotive expected to remain stable.
- No change to forecasts; maintain BUY and Target Price of S$0.75.
Attractive valuation with c.4% yield; diversification brings resilience and stability.
- At 7.3x FY19F and 6.7x FY20F earnings, FRENCKEN GROUP LIMITED (SGX:E28) is trading at about 40% discount to peers’ average of 12x PE, which is too steep, in our view. Furthermore, the stock is supported by a dividend yield of about 4-5%, based on a 30% payout ratio.
- Frencken has a strong presence in a wide variety of industries and business segments. It operates five key segments - Automotive, Analytical & Life Science, Medical, Semiconductor and Industrial & Industrial Automation. This reduces the volatility of a single sector exposure and also helps to weather the challenging environment caused by trade concerns. This business diversity provides greater resilience and stability to the group.
Beneficiary of technological advancements.
- The accelerating scope of technological changes, like data analytics and Internet of Things (IoT), as well as the transformation of the Automotive industry and advances in the Analytical and Medical segments are some of the key drivers for Frencken’s business.
1Q19 results in line.
- Frencken's 1Q19 net profit surged 27% y-o-y on the back of the 14.7% gain in revenue. Growth was mainly driven by the industrial automation and analytical segments. These two segments are expected to continue to drive growth in 2Q19.
Valuation:
- Maintain BUY and Target Price of S$0.75.
- Our target valuation is based on 8.5x PE on blended FY19F and F20F earnings, and pegged to a 20% discount to peer average, given its smaller scale.
Key Risks to Our View:
- Dependence on global market conditions. As Frencken has exposure to customers in the US, EU and Asia, a broad global economic slowdown could impact demand and earnings.
WHAT’S NEW - Y-o-y improvement in Frencken's 1Q19 revenue and profit
1Q19 results in line.
- Frencken reported a 14.7% y-o-y increase in group revenue to S$159.1m. This was driven mainly by sales growth of the Mechatronics Division. The IMS Division recorded a marginal sales decline in 1Q19. The Mechatronics and IMS Divisions contributed 80.5% and 19.5% respectively to group revenue in 1Q19.
- In terms of earnings, the IMS Division reported net profit of S$0.5m, reversing from a loss of S$0.1m in 1Q18. Group net profit of S$8.6m was up 27% y-o-y (-22% q-o-q). This accounts for 24% of our FY19F forecast while group revenue accounts for 23%; in line as we are expecting a stronger 2H.
Mechatronics growth driven by industrial automation and analytical segment.
- Revenue at the Mechatronics Division increased 19.7% y-o-y to S$128.0m in 1Q19, driven mainly by robust sales growth of the industrial automation segment. Sales of the industrial automation segment, which is typically lumpy in nature, increased 194.4% y-o-y in 1Q19 due to higher orders for storage drive production equipment from a key multinational customer in Asia.
- The analytical segment recorded a sales increase of 11.3% in 1Q19, attributable primarily to increased orders from a key customer in Europe as a result of steady demand from end-users of analytical equipment. Sales of the semiconductor segment decreased 26.6% y-o-y in 1Q19 due to the general slowdown in demand for semiconductor equipment.
- Revenue of the IMS Division registered a marginal sales decline of 2.3% y-o-y in 1Q19 due mainly to reduced sales of the consumer & industrial electronics and tooling segments. Sales of the automotive segment improved 3.4% y-o-y, lifted by higher sales of automotive gearbox filter products.
Slight decline in gross profit margin but net margin improved.
- Gross profit margin decreased slightly to 15.8% in 1Q19 from 16.7% in 1Q18 due mainly to a shift in revenue contributions from the group’s diverse business segments.
- Net margin improved to 5.4% from 4.9% in 1Q18, due primarily to lower staff salaries and related costs.
Outlook and Recommendation
Diversification brings resilience and stability.
- The macroeconomic backdrop is expected to remain challenging due to uncertainties caused by trade concerns and a cyclical downturn in semiconductor industry. Frencken, with its diversification in terms of business segment, customer base and production facility, should provide greater resilience and stability to the group to weather the challenging environment.
Industrial automation, analytical and medical segments to drive growth in 2Q19.
- Revenue of the industrial automation segment, which is typically lumpy in nature, is anticipated to continue posting robust y-o-y growth in 2Q19, on the back of orders for storage drive production equipment from a key multinational customer in Asia.
- The analytical and medical segments are expected to show y-o-y revenue growth in 2Q19. Semiconductor segment is expected to remain weak while the automotive segment in 2Q19 is expected to be relatively stable as compared to 2Q18.
- See initiation report: Frencken Group - DBS Research 2019-04-15: Beauty Of Diversification.
No changes to forecasts; maintain BUY and Target Price of S$0.75.
- No changes to our numbers given Frencken's in-line results.
- Our target valuation is based on 8.5x PE on blended FY19F and F20F earnings, and pegged to a 20% discount to peer average, given its smaller scale.
Lee Keng LING
DBS Group Research
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https://www.dbsvickers.com/
2019-05-10
SGX Stock
Analyst Report
0.750
SAME
0.750
