Frencken Group - CGS-CIMB Research 2020-10-23: Earnings Outlook Remains Positive

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Earnings Outlook Remains Positive

Seagate Technology’s 1Q21 results confirm that revenue opportunities for Frencken’s IA business segment remains intact.
We are also positive on the outlook for Frencken’s semiconductor business segment.
We reiterate our ADD call on Frencken with a higher target price as we roll over to FY22 core EPS on a higher 11x P/E peg.

Seagate Technology (STX US) reported its 1Q21 results yesterday (22 Oct 2020). STX is the main customer in Frencken Group (SGX:E28)’s IA (industrial automation) business. STX guided that the company is on track to ship 20-terabyte HAMR (heat assisted magnetic recording) drives in Dec 20 and plans to have 50-terabyte HAMR drives available in 2026. STX also guides that it will need additional capex to achieve this technology transition.
We think this will support continued revenue opportunities for Frencken’s IA (20% of 1H20 revenue) business segment in FY20-22F.

We are positive on the outlook for Frencken’s semiconductor business (30% of 1H20 revenue). According to Digitimes (28 Sep 2020), TSMC (2330 TT) is expected to cumulatively purchase about 55 sets of EUV (extreme ultraviolet) lithography equipment by the end of 2021, as the foundry steps up its EUV process manufacturing.
We believe this will benefit Frencken as it supplies modules and limited sub-assemblies to ASML (ASML US; maker of EUV equipment). ASML has enjoyed strong demand for its EUV machines in FY20).

Frencken’s automotive segment’s (11% of 1H20 revenue) revenue has declined from S$126.2m in FY16 to S$93.7m in FY19. While an exit from the automotive business is a possibility, we note that Frencken has seen some success with its proprietary and niche eco-physical vapour deposition (eco-PVD) technology and its engine filter products.
Frencken has also boosted productivity and reduced operating cost in this business. Hence, we think that Frencken’s strategy for its automotive business will be to continue to leverage on new industry needs and develop value-added solutions for its automotive customers.

Reflecting our optimism on its earnings outlook, we raise Frencken's FY22 core EPS by 3.5% and assign a higher P/E multiple of 11x as we rollover to FY22F core EPS. Our 11x P/E multiple is an 8% discount to the sector average P/E multiple of 12x and in line with 1 s.d. above Frencken’s 7-year average forward P/E of 11x. We previously used a P/E multiple of 10x.
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 re-rating catalysts from new customer wins and stronger-than-expected sales in its IA.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-23

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