Frencken Group - CGS-CIMB Research 2020-11-12: Managing Well Despite COVID-19

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Managing Well Despite COVID-19

Frencken's 3Q20 core net profit at 33%/34% of our/consensus full-year forecast was better than expected.
The outperformance was achieved via tight cost control, higher productivity and a better sales mix.
Adjusting for the better-than-expected gross profit margin, our target price is raised slightly to S$1.27. Reiterate ADD.

Frencken Group (SGX:E28) provided a voluntary business update for its third quarter. 3Q20 revenue (-2.8% y-o-y) at 26%/27% of our/Bloomberg consensus full-year forecast was in line with expectations. 3Q20 net profit of S$13.3m (+16.7% y-o-y) was above expectations at 33%/34% of our/consensus FY20F forecasts.
While detailed financials were not disclosed, we think that Frencken's better-than-expected earnings were driven by
1. a shift in sales mix in favour of semiconductor products that offer better margin,
2. higher operational efficiencies and
3. tighter cost control measures.
In 3Q20, the semiconductor segment recorded the strongest y-o-y revenue growth of 49.5% to S$50.2m, while the industrial automation segment saw the largest y-o-y decline (-32% y-o-y) to S$34.4m.
Frencken's net cash as at end-Sep 2020 was S$69.3m.

Frencken guides that 2H20 versus 1H20 should still see modest revenue growth. Business segments that are expected to post h-o-h revenue improvement are semiconductor, analytical and automotive. The medical segment is expected to see lower revenue in 2H20 compared to 1H20 while the industrial automation segment’s revenue is expected to be stable in 2H20 compared to 1H20.

Adjusting for the better gross profit margin achieved by Frencken, we raise our FY20F-FY22F core EPS forecast by 0.92%-4.76%. At an unchanged 11x FY22F core EPS, our target price for Frencken is raised slightly to S$1.27 (previously S$1.25).
Our 11x P/E multiple is a 10% premium to the sector average P/E multiple of 10x and in line with 1 s.d. above Frencken’s 7-year average forward P/E of 11x.
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 the industrial automation segment.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-12

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