Frencken Group - RHB Invest 2020-04-15: Resilient Despite Disruption; Keep BUY

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Resilient Despite Disruption; Keep BUY

BUY, new DCF-backed Target Price of SGD0.90 from SGD1.05, 27% upside with 4% FY20F yield.
With the COVID-19 pandemic causing a global lockdown, a few of Frencken Group (SGX:E28)’s factories – like those in Malaysia and China – have halted operations temporarily. That said, management revealed that most of its other factories around the world have resumed normal operations. As such, the supply impact to customers should be minimal.

As it is a part of the supply chain for essential products such as semiconductors and healthcare equipment, Frencken Group’s Singapore division is not impacted by the government-implemented “circuit breaker”.

To comply with Malaysia’s Movement Control Order (MCO), Frencken Group closed its factories there for two weeks in March. Since then, its mechatronics manufacturing operation in Bangi has received approval from the Malaysian Government to resume operations – albeit with a reduced number of workers during the MCO.

Frencken Group’s semiconductor segment is likely to record strong double-digit growth this year, riding on the uplift in the semiconductor space. Management also guided for y-o-y growth in 1Q20F, as a result of increased sales from customers in Asia and Europe.
Based on our channel checks and the performance of companies in the supply chain on the semiconductor sector, we believe that this segment will be a key positive catalyst for Frencken’s EPS growth in 2020.

Management remains bullish in its outlook, as the company should benefit from its key customer’s new product in the industrial automation segment in FY20F, despite expecting a drop just for 1Q20F.
We remain bullish on its semiconductor business, which should still chart y-o-y growth this year. However, with global supply chains impacted by the COVID-19 pandemic as well the temporary shutdown in some its factories, we expect other segments to be negatively impacted. As such, this should lower FY20-21F EPS by 10%.
These cuts should likely be smaller than that of some peers, as we expect its earnings to still remain quite resilient. As a result, our DCF-backed Target Price drops to SGD0.90, from SGD1.05. Maintain BUY.
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Key risks include an economic slowdown, and customers delaying orders.