Frencken Group - Maybank Kim Eng 2020-11-21: Resilience & Diversity; Proxy To Growth Trends In 5G/AI

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FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Resilience & Diversity; Proxy To Growth Trends In 5G/AI

BUY Frencken for margin expansion potential

• We see Frencken Group (SGX:E28) as a proxy to growth trends in 5G/AI, health and wellness and population ageing through its blue-chip customers.
• In the short term, semiconductor equipment/analytical/automotive end-markets, which form around 70% of sales, should provide cyclical resilience. Longer-term, we are excited by margin growth potential from deepening value-add with customers as Frencken launches a breadth of products in coming years.
• Maintain BUY on Frencken with ROE-g/COE-g target price of S$1.39 (1.6x FY21E P/B).

Deepening engagement with blue chip customers

• In its mechatronics segment (c.80% of revenues), Frencken’s market-leading customers include ASML, Seagate, Thermo Fisher and Philips. Mechatronics products tend to be critical, have demanding requirements, and Frencken is usually the sole source.
• Frencken is currently involved in a breadth of new products across semiconductor, analytical, medical and others slated for launch in coming years. As it provides greater design value-add, we believe margin expansion potential is currently underappreciated.

Around 70% of revenue in upswing/ recovery

• We forecast earnings growth of 21% for Frencken in FY21E – which we see underpinned by semiconductor equipment, analytical, and automotive end-markets, which we estimate account for around 70% of Frencken's revenues. These segments are currently in various degrees of upswing/recovery.
• Frencken's balance sheet is clean with net cash to equity of around 8%.
• See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.

Risks

• The key risk 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.

See also report: Technology Stocks - Maybank Kim Eng 2020-11-21: Riding A New Wave Of 5G, IoT, AI & EV; Upgrade to POSITIVE.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-11-21

SGX Stock Analyst Report BUY MAINTAIN BUY 1.390 SAME 1.390