Frencken Group - RHB Invest 2020-03-09: Outlook Still Bright For FY20F; Upgrade To BUY


Frencken Group - Outlook Still Bright For FY20F; Upgrade To BUY

  • Upgrade to BUY, from Neutral, with a higher DCF-backed Target Price of SGD1.05, from SGD0.91, 26.5% upside and c.4% yield.
  • We had a call with the management of Frencken Group (SGX:E28) and came out optimistic as Frencken should continue to benefit from its key customer in the industrial automation segment, and from an uplift in the semiconductors sector.
  • We raise our FY20F EPS by 14%, which results in a higher DCF-backed Target Price of SGD1.05.

Benefitting from expanding sourcing in the global supply chain.

  • The trade war already prompted many global companies to look for alternative supply chains, besides relaying solely on China; COVID-19 added an extra incentive to do so. With Frencken’s production base located outside China, we believe the company could be one of the beneficiaries of this trend.
  • Management revealed that it is in talks with several customers and, provided these talks materialize, it would have to increase its capex.

Riding the semiconductor sector uplift.

  • Frencken’s semiconductor segment is likely to see a strong double digit growth this year, riding the expected uplift in the overall semiconductor space. Management has also guided for an y-o-y growth in 1Q20F due to higher sales from its customers in Asia and Europe.
  • Based on our channel checks and performance of companies in the supply chain in the semiconductor sector, we believe that this segment will be a key positive catalyst for Frencken’s EPS in 2020F

Outlook still positive; upgrade to BUY.

  • Management remains bullish to benefit from its key customer’s new product in the industrial automation segment for FY20F, despite expecting a drop just for 1Q20F. 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.
  • With a positive outlook ahead, despite current macroeconomic conditions, we think Frencken is one of the rare manufacturing firms that is still likely to deliver y-o-y growth this year. As a result, we lift our FY20F EPS by 14%, which results in a higher DCF-backed Target Price of SGD1.05 (from SGD0.91) and lift our call to BUY from Neutral.
  • 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 risks include an economic slowdown and customers delaying orders

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-09
SGX Stock Analyst Report BUY UPGRADE HOLD 1.05 UP 0.910