Frencken Group - CGS-CIMB Research 2020-08-25: Growth To Resume In FY21F

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Growth To Resume In FY21F

Frencken Group held its virtual results briefing on 19 Aug 2020.
In our view, 2H20F performance will be better than 1H20’s but FY20F net profit will still decline by 11% y-o-y.
Upgrade to ADD from Reduce as the current Frencken Group share price better reflects the FY21F earnings outlook.

Frencken Group (SGX:E28) held its virtual 1H20 results call on 19 Aug 2020. Key questions revolved around the outlook for 2H20F and opportunities in FY21F. Management reiterated that 2H20 performance is likely to be better than 1H20’s.
Given the impact from COVID-19 in 1H20, we expect Frencken Group's FY20F net profit to decline 11.1% despite the better 2H20F outlook h-o-h. Management said it will manage costs diligently.

The four key segments in the mechatronics business are:
1. semiconductor (30% of 1H20 sales);
2. industrial automation (20% of 1H20 sales);
3. analytical (19% of 1H20 sales); and
4. medical (15% of 1H20 sales).
Semiconductor segment’s revenue grew 73.6% y-o-y in 1H20, and given the positive semiconductor equipment spending outlook, Frencken Group expects 2H20F revenue to be stronger h-o-h.
Industrial automation revenue is likely to be stable h-o-h. Longer term, there could be potential demand when its key customer’s new products achieve volume production.
One of the key customer in the analytical segment faced greater competition in 1H20, which led to the 23.9% y-o-y revenue decline for the segment. In 2H20F, we do not expect the lost market share to be regained; hence, the modest h-o-h revenue growth guidance.
The medical segment should see stable revenue in 2H20F, helped by COVID-19-related medical products.

The main segment in the IMS division is the automotive segment which accounted for 11% of 1H20 sales. This segment’s performance was negatively affected by customers’ factory shutdowns in Europe as well as the shutdown of Frencken Group’s plant in India due to COVID-19.
Given that customers’ plants have resumed operations, Frencken Group believes this segment will see h-o-h revenue growth in 2H20F. Frencken Group has also instituted cost reductions to mitigate the lower revenue in this segment.

Post 1H20 results, we downgraded our rating for Frencken Group from Add to REDUCE as we believed that the then FY21F earnings expectations were priced in. See report: Frencken Group - CGS-CIMB Research 2020-08-13: Challenging 2H20. Given the 22% decline in Frencken Group's share price since 13 Aug, valuations are now more attractive and we upgrade our call from Reduce to ADD.
Our S$1.06 Target Price is still based on 10x FY21 P/E (17% discount to the domestic peer average of 12.1x).
See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.
Downside risks are order pullbacks by customers while upside risks could come from new customer wins and stronger-than-expected sales in its industrial automation segment.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-25

SGX Stock Analyst Report ADD UPGRADE REDUCE 1.060 SAME 1.060