Frencken Group - RHB Invest 2019-08-13: Robust 2Q19, Muted 3Q19 Ahead; Stay BUY


Frencken Group - Robust 2Q19, Muted 3Q19 Ahead; Stay BUY

  • Keep BUY and DCF-backed SGD0.82 Target Price, 24% upside plus 4.2% yield.
  • As the bulk of Frencken Group (SGX:E28)’s factories are in Europe – along with its business activity – the group has been unaffected by the US-China trade war till now.
  • Management is guiding for a more muted outlook going forward, where 3Q19 will likely see a slowdown for the industrial automation segment due to its lumpy business nature, while other segments face slower demand from Frencken Group’s European customers. However, we are still positive over a good FY19.

Muted 3Q19 ahead.

  • Sales at the industrial automation segment, which are typically lumpy in nature, increased 128.7% in 2Q19. This was boosted by increased orders for storage drive production equipment from a key customer setting up a new factory.
  • Management expects a marginal increase in 3Q19, but a q-o-q decrease, as orders for these segments are, by trait, usually lumpy.
  • Management is also expecting a slowdown on the outlook of its analytical and medical units in 3Q19 on slower orders from customers in Europe. However, we are projecting y-o-y growth in FY19 at these two businesses, driven by new customers and projects, and the strong 1H19.

Higher dividends to be expected.

  • 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 FY19 yield to increase to c.4.2%. See Frencken Group's dividend history.

One of the rare manufacturing companies delivering growth in FY19.

  • 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 7.3x FY19F P/E – well below peers’ 9.9x – and a 4.2% yield for this FY, we believe this counter is undervalued.
  • Despite a muted 3Q19 ahead, we think Frencken is still one of the rare manufacturing firms that is still likely to deliver y-o-y growth this year. As a result, we stick to our call and DCF-backed Target Price.
  • Key risks include an economic slowdown and customers delaying orders.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.820 SAME 0.820