FRENCKEN GROUP LIMITED (SGX:E28)
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.
- Due to the delay in its industrial automation segment, we believe FY21 will be a strong year for Frencken where both its semiconductor and industrial segments should drive profits upwards for the company. As a result, we expect a 12.5% growth in EPS for FY21F and increase our FY20F earnings by 8%, resulting in a higher DCF-backed target price of S$1.22, implying only 10.9x FY21F P/E.
- Frencken's share price has recovered since our last call, but valuation remains undemanding and there is room for further re-rating as its peers are trading at a higher valuation. We are also confident on the long-term prospects of this company and its management. As a result, we maintain our BUY call on Frencken.
- 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 include an economic slowdown and customers delaying orders.
Jarick Seet
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-11-16
SGX Stock
Analyst Report
1.22
UP
1.160
