Frencken Group - RHB Invest 2019-05-10: Solid 1Q19, Robust Outlook Ahead; Stay BUY


Frencken Group - Solid 1Q19, Robust Outlook Ahead; Stay BUY

  • Stay BUY and DCF-backed Target Price of SGD0.82, 33% upside plus 5% yield.
  • FRENCKEN GROUP LIMITED (SGX:E28)'s topline rose 14.7% y-o-y to SGD159m and PATMI surged 27.2% to SGD8.6m, mainly due to 194.4% y-o-y surge in the Industrial automation segment.
  • Management guided for a positive outlook, with 2Q19 continuing to see strong y-o-y growth for this segment, and continued growth for analytical and medical segments.
  • We project 27% boost in FY19F PATMI. At 6.8x FY19F P/E vs peers’ 9.9x, we believe Frencken is undervalued.

Industrial automation to lead growth in FY19.

  • Frencken's sales at the industrial automation segment, which are typically lumpy in nature, increased significantly by 548.4% y-o-y in 4Q18 and 194.4% in 1Q19, boosted by increased orders for storage drive production equipment from a key customer that is setting up a new factory.
  • Management expects to post strong y-o-y growth in 2Q19 due to the same reason – we expect these growth factors to continue to drive sales in 2Q19 and 3Q19, which should be very positive for Frencken.
  • Management is also bullish on the outlook of its analytical and medical units, and expects continued y-o-y growth of these segments in 2Q19. We are projecting y-o-y growth in FY19 for these two units as well, driven by new customers and new projects.

Dividends likely to increase.

  • With a 30% payout ratio, and our projection of continued y-o-y growth in earnings, we believe dividends will increase despite an unchanged dividend payout ratio.
  • We expect Frencken's FY19 dividend yield to increase to around 4.5%. See Frencken's dividend history.

Attractively valued, with a surge in growth for FY19F.

  • We believe Frencken’s technology, which has been making rapid advancements in recent years, will provide more solutions to its customers and support future projects, in terms of margins and profitability.
  • As the stock is trading at just 6.8x FY19F P/E – well below its peers’ 9.9x, and with a 4.5% FY19F dividend yield – we believe Frencken is undervalued and will likely continue to re-rate upwards, as earnings growth continues to pick up in subsequent quarters.
  • Key risks include economic slowdown, and customers delaying orders.
  • See also the initiation report: Frencken Group - Riding The Industrial Automation Boom.
  • Frencken is also one of the RHB's Top Singapore Small Cap Companies - 20 Jewels 2019 Edition.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | 2019-05-10
SGX Stock Analyst Report BUY MAINTAIN BUY 0.820 SAME 0.820