Frencken Group Ltd - CGS-CIMB Research 2019-05-10: Industrial Automation Leads The Way Up


Frencken Group Ltd - Industrial Automation Leads The Way Up

  • FRENCKEN GROUP LIMITED (SGX:E28)'s 1Q19 results in line, with net profit up 27.2% y-o-y to S$8.6m.
  • Strong earnings led by stellar revenue growth of 194% in the industrial automation segment, as expected.
  • Re-iterate our ADD call on robust outlook, unchanged Target Price of S$0.90.

Results spot-on; in line with expectations

  • FRENCKEN GROUP LIMITED (SGX:E28) reported a 1Q19 net profit of S$8.6m, meeting 24%/24% our/consensus’ FY19F forecasts.
  • Frencken’s 1Q19 revenue gained 14.7% y-o-y to S$159m with Industrial Automation (IA) delivering the strongest growth of 194.4% across all segments for the quarter, within our expectations.
  • Net margin in 1Q19 expanded to 5.4% from 4.9% in the previous year on lower operating cost base.

Anticipating robust growth in IA segment to continue ahead

  • Frencken painted an optimistic outlook, with positive market trends in global technology sector and anticipates revenue from its IA segment to continue to post robust y-o-y growth in 2Q19F on the back of orders for storage drive production equipment ahead. In its latest earnings call, Seagate guided that it expects to introduce high-capacity (over 20TB) drives in CY20, based on its Heat Assisted Magnetic Recording (HAMR) technology.
  • From the feedback of Seagate’s customers, the HAMR drives were well-received. Seagate expects demand for its storage drives to recover in 2HCY19 and we believe this supports our robust FY19 growth outlook in Frencken’s IA segment.

Balance sheet robust, returns to net cash position

  • As at end-Mar 19, Frencken returned to a small net cash position S$2.3m after generating robust operating net cash of S$8.9m for the quarter.
  • We continue to project FY19F dividend yield of 4.15% based on a 30% payout, within its historical 30% range.

Maintain ADD

  • We leave our FY19-21EPS forecasts unchanged and reiterate our ADD call on Frencken on the back of robust FY19F growth outlook. Our Target Price of S$0.90 is based on 10x FY20F P/E, in line with domestic peer average of 9.5x.
  • (See initiation report: Frencken Group - CGS-CIMB 2019-04-16: Year Of Industrial Automation)
  • Frencken is currently trading at 6.9x FY20F P/E, below peers.
  • Key re-rating catalysts could come from new customer wins and stronger-than-expected sales in its IA segment.
  • Downside risks are order delays or pullback by customers.

William TNG CFA CGS-CIMB Research | Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-10
SGX Stock Analyst Report ADD MAINTAIN ADD 0.900 SAME 0.900