Frencken Group - DBS Research 2020-04-01: Diversification Helps


Frencken Group - Diversification Helps

  • Frencken Group (SGX:E28)'s factories in Malaysia partially affected; China plants resumed operations.
  • Exposure to Medical segment an added advantage during pandemic crisis.
  • Expect better performance for Semiconductor.
  • Maintain BUY with a lower Target Price of S$0.74.

COVID-19 impact – Diversification to help cushion impact

Supply and demand affected.

  • The COVID-19 pandemic has hit the business world at an unprecedented scale and speed. It has led to closures of businesses, stoppage of factory outputs, and disruption to global manufacturing industries and their supply networks. The issue is compounded with the lockdown orders and movement restrictions, leading to a demand crisis.

Factories in Malaysia partially affected; China plants have resumed operations.

  • Frencken Group has received approval from the authorities in Malaysia to continue with its mechatronics manufacturing operations in Bangi, but with a reduced number of employees during the period of the Movement Control Order. Its factories for the Integrated Manufacturing Services (IMS) division in Sungai Buloh and Johor remained closed during this period.
  • In China, Frencken Group’s five factories in Wuxi, Chuzhou, Tianjin and Zhuhai (Jinding and Nanshui) have resumed normal operations and are fulfilling orders from customers.

Guided for positive 1QFY2020 outlook for Semiconductor and Medical segments

  • Together with the release of FY19 results in February, Frencken Group has guided for a positive outlook in 1QFY20, compared to 1QFY19 for the Semiconductor and the Medical segments. These two segments accounted for 37.6% of FY19 revenue in the Mechatronics division, and 30.7% of Group revenue.
  • Frencken Group expects weaker results for the Industrial Automation, Automotive and Analytical segments.

Exposure to Medical segment an added advantage in this pandemic crisis.

  • For the Medical division, Frencken Group is involved in components and sub-assembly for CV (cardiovascular) patient tables, histopathology digital scanners, X-Ray gantry, and telescopic tubes and micro motors for heart implants.
  • Exposure to the Medical segment is an added advantage during this pandemic crisis as some countries, like Italy and Spain, have already reached the limit on their medical resources.

Expect better performance for Semiconductor.

  • We expect the Semiconductor sector to fare better than others in the technology value chain, as it forms part of the essential goods supply chain. Frencken Group has c.20% exposure to this segment.

Maintain BUY with a lower Target Price of S$0.74, pegged to 8.3x FY20F PE.

See also

Lee Keng LING DBS Group Research | 2020-04-01
SGX Stock Analyst Report BUY MAINTAIN BUY 0.740 DOWN 1.06