Frencken Group - UOB Kay Hian 2020-09-10: Investor Interest Gaining Traction


Frencken Group - Investor Interest Gaining Traction

  • Frencken Group is seeing strong demand for semiconductor components, a healthy pricing environment and rising ROEs. We continue to like Frencken Group and are seeing positive interest in the company following our initiation.
  • Re-iterate BUY on Frencken Group and target price of S$1.37.

Demand for semiconductor components remains strong.

  • The semiconductor segment is estimated to contribute 32% and 35% of group sales for Frencken Group (SGX:E28) in 2020-21F respectively (2019: 18%). This will be driven by the huge demand stemming from the accelerating development of 5G technology, reflected in the record capex spending by major foundries TSMC and Samsung in 2020-21.
  • Following some supply chain issues caused by the COVID-19 lockdown measures in 1H20, management has indicated that the majority of the issues has been resolved and factories are back in full operations, working to meet clients’ urgent deliveries.

Healthy pricing environment.

  • Factory utilisation is understood to be high, and demand from clients currently outstrips production capacity. This reflects a healthy pricing environment for the components manufactured by Frencken Group, which is managing the delicate balance between maintaining clients’ relationships and maximising revenue opportunity.

ROE rising as company moves up value chain.

  • Frencken Group is deepening its core competency to provide niche components, modules and designing of the whole product. The group has been moving away from the built-to-print model, ie contract manufacturing, which does not provide any value add to its clients. For instance, Frencken Group is the sole global supplier of the reticle masking unit (REMA), a key module for the Extreme Ultraviolet (EUV) lithography system developed by ASML.
  • Apart from the mechanical design, assembly and test, Frencken Group also manages the supply chain and provides lifecycle support for REMA.

Poised for recovery after healthy share price consolidation.

  • On the back of a stronger operational footing, we believe management would be able to deliver the shortfall of orders in 1H20, particularly in the semiconductor segment, which is seeing a recovery into 2H20. This should result in improved q-o-q earnings, with share price anticipated to move in tandem.

Improving operating margin.

  • Frencken Group’s on-going improvement of operational efficiency has shown marked progress, and is expected to further bolster EBITDA margin going forward. Since implementing Frencken Operations eXcellence and Frencken Production System in 2017, operational efficiency has improved across Frencken Group’s worldwide manufacturing facilities.
  • Frencken Group’s 2018-19 revenue rose at a 13.1% CAGR, while EBITDA saw a marked improvement of 32.1%, mainly bolstered by the impressive 9.6% reduction in SG&A expense. We expect 2020-22F EBITDA margins to normalise above 11%, from the sub-9% region between 2014 and 2017. Additionally, management continues to make investments to upgrade equipment and facilities to elevate its competitive edge and enhance capabilities, which should help further lift efficiency.

Maintain BUY on Frencken

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.370 SAME 1.370