Frencken Group Ltd - CGS-CIMB Research 2019-08-09: Better-than-expected 2Q19

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FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group Ltd - Better-than-expected 2Q19

• Frencken Group's 2Q19 results were better than expected, driven by the industrial automation segment.
• 3Q19 revenue outlook seems neutral. IMS Division turned around to S$1.4m net profit versus S$0.2m loss in 1H18.
• Reiterate our ADD call with a higher Target Price of S$0.95 on lower cost assumptions.

Industrial automation continues to shine

• FRENCKEN GROUP LIMITED (SGX:E28)'s 1H19 core net profit was above expectations, at 55% of our full-year forecast.
• Overall, revenue grew 11.5% y-o-y in 2Q19. The automotive division saw a 5% y-o-y decline while the mechatronics division’s revenue grew 17% y-o-y.
• The key driver behind the mechatronics division’s growth was the industrial automation segment which grew 129% y-o-y.

IMS division making some progress

• The IMS division reported a net profit of S$1.4m in 1H19, reversing from a loss of S$0.2m in 1H18. This division made S$0.5m in 1Q19 and net profit improved further to S$0.9m in 2Q19. As at 1H19, the net profit margin of the IMS Division was 2.22% versus 6.82% for the mechatronics division.
• Given the significant net profit margin difference, we believe Frencken Group would either need to
  1. scale up this business,
  2. change the product mix,
  3. consider acquisitive growth or even
  4. reassess if this business remains a good fit in the company’s long-term strategy.

3Q19 outlook seems neutral

• For 3Q19, out of its five key business segments, Frencken Group expects two segments to see moderate revenue improvement y-o-y, one to remain stable and two to post softer revenue y-o-y. The group’s strategy going forward is to seek value creation opportunities with customers via its “Build to Spec” model.

Maintain ADD with a higher S$0.95 Target Price

• Given the better-than-expected results, we raise our FY19-20F core net profit as our previous cost assumptions may have been too steep. Our Target Price of S$0.95 is still based on 10x FY20F P/E, in line with the domestic peer average of 10.2x.
• Key re-rating catalysts could come from new customer wins and stronger-than-expected sales in its industrial automation segment.
• Downside risks are order delays or pullback by customers.
• A key specific risk is in the industrial automation segment given the high reliance on a single customer.

William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-09

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