Frencken Group - RHB Invest 2019-11-11: Riding The Industrial Automation Boom; BUY

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Riding The Industrial Automation Boom; BUY

Maintain BUY, DCF-based SGD0.82 Target Price, 8% upside plus 4% yield FY20F.
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 until now.
Management is guiding for a more muted outlook, with a likely slowdown in industrial automation in 4Q19 due to the segment’s lumpy business nature. However, it is still positive on the medical and semiconductor segments for 4Q19F.

Sales at the industrial automation segment, which are typically lumpy, increased 23.3% y-o-y in 3Q19. This was boosted by increased orders for storage drive production equipment, from a key customer setting up a new factory. See Frencken Group Announcements.
Management expects a revenue decline in 4Q19 (also a quarterly drop), as orders for these segments are usually lumpy.
Frencken Group also expects its analytical and automatic segments’ growth to tone down in 4Q, but anticipates y-o-y growth in the semiconductor and medical divisions, driven by new customers and projects.

With a 30% dividend payout ratio and our projection of continued y-o-y growth in earnings, we believe dividends will increase despite its payout ratio staying unchanged. We expect the FY19 yield to increase to c.3.6%. See Frencken Group Dividend History.

We believe Frencken Group’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 8.4x FY19F P/E – well below the peer average of 9.9x – and offering a 3.6% yield for this FY, we believe this counter is undervalued.
Despite a muted 4Q19F ahead, Frencken Group is still one of the rare manufacturing firms likely to deliver y-o-y growth this year. As a result, we stick to our call and DCF-backed Target Price. See Frencken Group Share Price; Frencken Group Target Price.
Key downside risks to our call include an economic slowdown and customers delaying orders.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-11-11

SGX Stock Analyst Report BUY MAINTAIN BUY 0.820 SAME 0.820