Frencken Group - DBS Research 2020-05-15: Semiconductor & Medical To Shine


Frencken Group - Semiconductor & Medical To Shine

  • Frencken's 1Q20 performance within expectations.
  • Almost all manufacturing plants back to normal operations.
  • Expect Semiconductor and Medical segments to post q-o-q revenue growth in 2Q20; stable for Analytical.

Maintain BUY with higher Target Price of S$0.92.

  • Despite the COVID-19 pandemic that has affected the supply chain and end-user demand, Frencken Group (SGX:E28) still managed to report a decent set of 1Q20 results. With the gradual removal of restrictions globally, the supply chain should be more stable going forward. To date, almost all Frencken's manufacturing plants are already back to normal operations.
  • Frencken’s strong presence across a wide variety of industries and business segments should help to provide resilience and stability to the Group. Furthermore, Frencken has exposure (c.13% FY19 revenue) to the Medical segment, which is an added advantage during this pandemic crisis.
  • We also 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 has c.20% exposure to this segment.
  • At 9.2x FY20F and 8.4x FY21F earnings, Frencken is trading at about c.30% discount to its peers’ average of 13x PE. The stock is supported by a dividend yield of about 3.2% based on a 30% payout ratio.

1Q performance within expectations.

  • Frencken reported revenue of S$151.4m in 1Q20, a decline of 4.8% y-o-y. This was mainly due to lower sales from the Automotive, Industrial Automation and Analytical segments, which was partially offset by increased sales of the Semiconductor and Medical segments.
  • Despite the lower revenue, Frencken's net profit increased 10.5% y-o-y to S$9.5m in 1Q20. This was principally due to forex gain as a result of the strong USD, as well as reductions in freight costs and administrative and general expenses. Net profit margin improved to 6.3% in 1Q20, vs 5.4% in 1Q19 but eased 0.5 percentage point from 4Q19.
  • Overall, net profit is in line, accounting for 25% of our FY20F forecast.

Almost all manufacturing plants back to normal operations.

  • To date, Frencken’s factories in Singapore, Malaysia and China have resumed normal manufacturing operations following the easing of the respective government restrictions. Normal operations are also continuing at the Group’s factories in Thailand, the Netherlands, the US and Switzerland, with the exception of the factory in Noida, India which remains temporarily closed as directed by the government.

Expect Semiconductor and Medical segments to post q-o-q revenue growth in 2Q20; stable for Analytical.

  • Frencken has guided for the Semiconductor and Medical segments to register q-o-q growth in revenue for 2Q20. These two segments account for 37.6% of FY19 revenue in the Mechatronics division, and 30.7% of Group revenue. The Analytical segment’s revenue is expected to be stable.
  • Industrial Automation segment’s revenue, which is typically lumpy in nature, is anticipated to decline q-o-q, while the Automotive segment remains weaker.

No changes in forecasts; maintain BUY with a higher Target Price of S$0.92.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-05-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.92 UP 0.740