Frencken Group - DBS Research 2020-06-30: Tailwinds From Semiconductor & Medical Segments

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FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Tailwinds From Semiconductor & Medical Segments

• Improving outlook of semiconductor industry.
• Expect Semiconductor and Medical, which account for c.30% of FY19 revenue, to post q-o-q revenue growth in 2Q20.
• Diversification helps to provide resilience and stability.

Maintain BUY on Frencken with higher Target Price of S$1.02.

• Frencken Group (SGX:E28)’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 good 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.
• Outlook for semiconductors remains positive. SEMI expects global fab equipment spending to jump 24% y-o-y in 2021, 10ppt higher than its previous forecast in 1Q 2020. May’s semiconductor equipment billing data was up 14% y-o-y, its eighth consecutive y-o-y increase since October last year and we view this as an optimistic sign for the industry.
• At 9.9x FY20F and 9.0x FY21F earnings, Frencken is trading at about c.30% discount to its peers’ average of 13x PE. See Frencken share price. The stock is supported by a dividend yield of about 3% based on a 30% payout ratio. See Frencken Dividend History.

Where we differ:

• We are optimistic that Frencken can tide over this period of extreme volatility given its diversified exposure.

Valuation:

• Maintain BUY with higher Target Price of S$1.02. We raised our Target Price to S$1.02 as we shift our valuation base to FY21F, still pegged to 10.4x PE, at a 20% discount to peers’ average given Frencken’s smaller scale.
• See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.

Potential Catalysts:

• Recovery of supply chain;
• Further positive developments on US-China trade war front;
• Better operational efficiency to improve margins.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-06-30

SGX Stock Analyst Report BUY MAINTAIN BUY 1.02 UP 0.920