Frencken Group - Maybank Kim Eng 2020-08-19: Continued Resilience

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FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Continued Resilience

Frencken Group's 1H20 in line; maintain BUY

• Frencken Group (SGX:E28)'s 1H20 PATMI was in line with ours and consensus estimates, falling 4.9% y-o-y to SGD18.7m due to disruptions caused by COVID-19.
• We trim FY20E EPS by 8% to be more in line Frencken Group’s current 2H20 outlook based on present visibility, while our FY20-21E are largely unchanged.
• Maintain BUY with higher ROE-g/COE-g Target Price of SGD1.33, as we roll forward to 1.6x FY21E P/B from 1.6x FY20E. We believe stronger than expected order momentum, driven by medical and industrial automation is a catalyst.

1H20 impacted by COVID-19 disruptions

• Frencken Group's 1H20 revenue fell 9.6% y-o-y to SGD292.5m, as relative resilience in mechatronics division (-4% y-o-y; semiconductor subdivision: +74% y-o-y) was offset by a 33% decline in the IMS division due to automotive weakness. In mechatronics, strength from semiconductor was offset by weakness from analytical and industrial automation.
• Gross margin fell 0.9ppt to 15.5%, due to weaker automotive volumes.

Upside drivers for 2H20

• We believe our 2H20 PATMI growth expectation of 5% h-o-h for Frencken Group is highly achievable on account of stronger contributions from semiconductor, automotive and analytical contributions h-o-h. Gross margin should also be higher h-o-h as semiconductor tends to be more profitable, while automotive should benefit from operating leverage. These are offset by our expectations for reduced government grants.
• We see upside potential from
  1. medical – if and when elective surgeries continue meaningfully, and
  2. industrial automation - from the customer’s capex to expand capacity for its heat assisted magnetic drives.
• See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.

Risks

• Supply chain issues are largely resolved, barring shortage of certain critical parts that are gating the delivery of certain products. We continue to think that the key risk to our view is prolonged economic uncertainty that may erode the resilience of Frencken Group’s diversified revenue streams.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-08-19

SGX Stock Analyst Report BUY MAINTAIN BUY 1.33 UP 1.200