Frencken Group - UOB Kay Hian 2020-09-03: Post-1H20 Results Update; Positioned For Sequential Recovery


Frencken Group - Post-1H20 Results Update; Positioned For Sequential Recovery

  • The post-1H20 earnings brief provided operational updates, with the main takeaway being that Frencken Group is positioned for recovery. The growth in the semiconductor segment should sustain into 2H20.
  • Following the healthy Frencken Group's share price consolidation post results announcement, we believe current valuation is attractive relative to peers. Reiterate BUY on Frencken Group and target price of S$1.37.

Internal supply chain issues largely resolved.

  • Frencken Group (SGX:E28) was hit by logistical issues after lockdown measures were implemented across the globe, particularly in Malaysia and China, which impacted operations between Apr and Jun 2020. Components were not delivered in time, which resulted in partial completion of products in the inventory.
  • The interruption has since receded except for some lingering impact in India, which primarily serves the domestic market and contributes just 0.9% to overall group revenue. Management has indicated that most clients have returned to normal production levels, and that the mechatronics division is back in full operations, working to meet clients’ urgent deliveries.

EUV lithography technology in stage of maturity.

  • Frencken Group’s decade-long investment in producing tools for Extreme Ultraviolet (EUV) lithography machines is finally gaining traction.
  • ASML, whom Frencken Group supplies EUV lithography tools to, is the world’s only supplier for EUV lithography machines and the systems have now proven production reliability.
  • Samsung’s newest batch of 10-nanometer 16Gb LPDDR5 memory modules will be the first to be built using EUV lithography, a signal that the technology is ripe for ramp up and would be able to sustain Frencken Group’s growth in the semiconductor segment.

Focus on improving margins in 2H20.

  • Supply chain disruption in 1H20 contributed a significant role in Frencken Group's 9.6% y-o-y drop in revenue, which also dragged gross profitability (- 0.9ppt y-o-y to 15.5%). The issues have now largely been resolved and with the continued cost efficiency programme being carried out in the weak automotive segment, we anticipate margins to improve going into 2H20.
  • Currently, estimates for gross margin for 2020F and 2021F are 16.1% and 17.1%, respectively.

Poised for recovery after healthy share price consolidation.

  • Frencken Group's share price has regained footing after a 25.4% retracement from its all-time high of S$1.26 to the recent low at S$0.94, following the release of its 1H20 results.
  • On the back of stronger footing operationally, we believe management would be able to deliver the shortfall of orders in 1H20, particularly in the semiconductor segment (32% contribution to 2020F sales) which is seeing a recovery into the second half. This should result in improved sequential performance, with Frencken Group's share price anticipated to move in tandem.

Frencken Group - Valuation & Recommendation

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-03
SGX Stock Analyst Report BUY MAINTAIN BUY 1.370 SAME 1.370