Frencken Group - RHB Invest 2020-11-16: Automotive a Potential Driver; Keep BUY


Frencken Group - Automotive a Potential Driver; Keep BUY

  • Frencken reported a decent 3Q20 where PATMI rose 16.7% y-o-y, despite the drop in the industrial automation segment as its key customer is likely to launch its new product in FY21 instead of FY20. However, with this segment expected to recover in FY21, and coupled with its strong semiconductor segment growth, we see FY21 to be a better year and Frencken to enjoy a decent earnings growth of 12.5%.
  • Maintain BUY, higher DCF-backed target price of S$1.22 from S$1.16, 16.2% upside and c.2.9% yield.

Riding on the semiconductor uplift.

  • Frencken Group (SGX:E28)’s semiconductor segment is likely to see strong double-digit growth this year, riding on the uplift in the semiconductor industry. Management has also guided for higher revenue in 2H20F due to higher sales from its customers in Asia and Europe.
  • Based on our channel checks and performance of companies in the supply chain of the semiconductor industry, we believe this segment will continue to be a key positive catalyst for Frencken’s earnings in 2020F.

Recovery in automotive sector.

  • The automotive segment’s revenue is likely to be better in 2H20F in than 1H20 as automotive sales pick up after the end of the global COVID-19 lockdown. We think that the automotive segment’s revenue will continue to pick up in FY21F as well.

Growth in industrial automation will likely come in FY21.

  • Frencken’s key customer in the industrial automation segment has delayed its new product launch due to supply chain issues – we think the launch will likely happen in FY21. As a result, we expect this segment to continue to take a hit and only see a recovery in FY21.
  • Frencken's management also guided that the industrial automation segment will remain stable in 2H20 after seeing a 35- 40% drop y-o-y in 1H20.

Twin growth drivers for FY21F.

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 1.22 UP 1.160