Frencken Group - CGS-CIMB Research 2020-02-28: Core Net Profit Above On Strong Margins

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Core Net Profit Above On Strong Margins

Frencken's FY19 core net profit was 22% above our expectations due to better cost control and contribution from higher gross profit margin filter business.
The Covid-19 outbreak is a risk. We understand that Frencken’s factories in China have resumed operations.

Reiterate ADD call and with a higher Target Price of S$1.06 (unchanged 10x P/E multiple) as we roll over to FY21F.

Frencken Group (SGX:E28)'s FY19 core net profit of 46.5m was 22% above our expectation and 19% above Bloomberg consensus. The better-than-expected performance was driven by margin expansion due to better profitability at the filter business.
Better cost control also helped as administration and general expenses fell by 8.1% y-o-y.
A higher final DPS of 3 Scts was declared (FY18: 2.14 Scts). Frencken's net cash as at end-Dec 2019 was S$69.2m.
Mechatronics division’s revenue fell 4.9% y-o-y in 4Q19 while the IMS division’s revenue fell 8.6% y-o-y, in line with Frencken’s guidance.

For 1Q20F, Frencken expects y-o-y revenue growth in its Semicon and Medical segments. The Analytical, Industrial Automation and Automotive segments are expected to see y-o-y revenue decline.
The Covid-19 outbreak is a risk and we understand that Frencken’s factories in China have resumed operations.

Reflecting Frencken’s improved margin, we raise our FY20-21F earnings forecasts by 7%-19%. FY22F forecasts are also introduced. Our Target Price is still based on 10x P/E multiple (13% discount to the domestic peer average of 11.5x). As we roll over to FY21F EPS, our Target Price rises to S$1.06.
See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.
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. We believe 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://www.cgs-cimb.com 2020-02-28

SGX Stock Analyst Report ADD MAINTAIN ADD 1.06 UP 0.940