FRENCKEN GROUP LIMITED (SGX:E28)
Frencken Group - Surpassing Expectations
3Q20 beat; target price +4.5%; Maintain BUY
- Frencken Group (SGX:E28)’s 3Q20 PATMI of S$13.3m (+16.7% y-o-y, +44.5% q-o-q) was ahead, with 9M20 forming 84%/82% of our and consensus expectations. Versus our forecast, industrial automation and automotive fell less than expected, while gross margin surprised positively.
- We lift Frencken's FY20-22E earnings forecast by 4-9% to reflect the strong results.
- We like Frencken for its long-term margin growth potential from increased value-add with customers. Maintain BUY with higher ROE-g/COE-g target price of S$1.39 (1.6x FY21E P/B).
Mix and efficiency drive GPM expansion
- Frencken's revenue fell 2.8% y-o-y to S$165.5m, primarily due to lower industrial automation (-32% y-o-y), analytical (-4.8%) and automotive sales (-4.4%), offset by growth in the semiconductor segment (+49.5%). However, PATMI rose 16.7% y-o-y, due to a 1.7ppt increase in gross margin to 17.6%. This was in turn driven by a favourable shift in sales mix, higher operational efficiency and tighter cost control.
Semi, analytical and automotive drive h-o-h growth
- Frencken is guiding for 2H20 revenue to grow modestly from 1H20, driven by h-o-h increases in semiconductor, analytical and automotive segments. Medical is guided to decline h-o-h, while industrial automation is guided to remain stable.
- Frencken's balance sheet is clean with net cash to equity of around 8%.
Long-term margin expansion potential
- Semiconductor, analytical and automotive accounts for around 70% of Frencken's FY20E revenue. End-markets for these segments are at varying degrees of upswing/ recovery – which we believe could sustain earnings momentum for Frencken.
- Additionally, we favour Frencken for its revenue diversity and long-term margin expansion potential as it rolls out a breadth of new products with higher value-add with blue-chip customers.
- See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.
- Key risks to our view is prolonged economic uncertainties that may erode the resilience of Frencken’s diversified revenue streams. Frencken indicated that the operating landscape remains challenging due to the negative effects of COVID-19.
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2020-11-12
SGX Stock
Analyst Report
1.39
UP
1.330
