Frencken Group - DBS Research 2020-02-28: Outlook Remains Positive

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Outlook Remains Positive

Frencken Group's FY19 results in line; net profit surged 41% on margin improvement.
Expect Semiconductor and Medical segments to grow y-o-y in 1Q20.
Industrial Automation division to decline in 1Q20 but outlook still positive for key customer.
No change in forecasts; maintain BUY and S$1.06 Target Price.

Frencken Group (SGX:E28)'s FY19 group revenue was up 5.3% to S$659.2m. Higher sales of the Mechatronics division more than offset lower sales of the IMS division.
The stronger sales from the Mechatronics division was mainly driven by the Industrial Automation segment. Sales of this segment grew 44.5%, attributable to higher sales of storage drive production equipment to a key multinational customer.
The semiconductor segment saw a 7.6% y-o-y decline in revenue. This was mainly due to lower sales orders for back-end semiconductor equipment during 1H19 as a result of the cyclical nature of the global semiconductor industry. In 4Q19, revenue from the semiconductor segment rose 14.7% y-o-y.

Gross profit for FY19 gained 9.6% to S$111.4m. Gross margin improved to 16.9% from 16.3%. In 4Q19, gross margins expanded to 18.9% from 16.7% in 4Q18.
The higher margin is due mainly to the improvement in margin for the filter business within the IMS division. Coupled with other cost saving initiatives, net profit jumped 41% to S$42.4m for FY19 while net margin improved to 6.4% from 4.8% in FY18.
Frencken Group recorded an impairment loss of S$4.1m in FY19. Without this, net profit would be higher.
DPS of 3 Scts was declared in FY19 (2.14 Scts in FY18), with a similar dividend payout ratio of 30%. This works out to a yield of 3.5%.

The global COVID-19 outbreak has affected the whole supply chain. Frencken’s factories in China have resumed operations after the temporary closure as stipulated by the authorities. Frencken has about six out of a total of 17 factories in China, and c.14% of its customers are from China, based on FY19 revenue.
As the current situation remains fluid and uncertain, it is difficult to determine the extent of the impact. However, Frencken’s diverse business segment and geographical footprint will help to cushion the impact and to provide resilience and stability to the group.

Revenue of the Semiconductor segment is expected to increase y-o-y in 1Q20 due to higher sales to customers in Europe and Asia.
Revenue of the Industrial Automation segment, which is typically lumpy in nature, is expected to decrease y-o-y in1Q20. However, this segment is driven by the capital expenditure requirements of a key customer which is expected to benefit from ongoing demand for mass capacity storage.
The Automotive segment in 1Q20 is expected to post lower revenue as compared to 1Q19.
The Medical segment is also expected to post y-o-y revenue growth in 1Q20 due to increased sales at its Europe operations.
However, revenue of the Analytical segment is anticipated to soften in 1Q20 as compared to 1Q19.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-02-28

SGX Stock Analyst Report BUY MAINTAIN BUY 1.060 SAME 1.060