FRENCKEN GROUP LIMITED (SGX:E28)
Frencken Group - One-off Does Not Impact A Positive Outlook; Keep BUY
- Frencken announced that it would take an impairment loss of S$6.2m associated with the development of a product in the healthcare industry due to a strategic direction change by its customer to not launch the product. Management revealed that the incident does not impact the future outlook of its medical segment as it did not project any revenue from this product and the impairment is a non-cash item.
- Maintain BUY with a higher DCF-derived target price and ~3% yield.
Just a one-off non-cash impairment.
- Management expects this impairment to be one-off and will not impact the cash balance of the company. Management did not include any projections from the product in the 2021-2022 projections of its medical segment.
- Despite the development costs being impaired, Frencken Group (SGX:E28) still owns the design patents associated with this product and could still benefit from it, should the customer decide to launch the product in the future.
Recovery in the automotive sector.
- Frencken's revenue from the automotive segment is likely to be better in 2H20 vs 1H20, as the automotive sales have picked up after the end of the global lockdown caused by COVID-19. We think revenue from this segment will continue to pick up in 2021 as well.
Growth in industrial automation will likely come in 2021.
- Frencken’s key customer in the industrial automation segment has delayed its new product launch due to supply chain issues. As a result, we now estimate the launch will likely happen in 2021, expect this segment to continue taking a hit, and only see a recovery next year, in 2021.
- Frencken's management also guided that the industrial automation segment would remain stable in 2H20 after seeing a 35-40% drop y-o-y in 1H20.
Twin growth drivers for 2021.
- Due to the delay in Frencken’s industrial automation segment, we believe 2021 will be a strong year for the group, where both its semiconductor and industrial segments should drive profits upwards.
- We lowered our 2020 forecasts to reflect the impairment of S$6.2m but have included higher growth expectations from the automotive and semiconductor sector for 2021F. As a result, we expect a 38.5% growth in Frencken's earnings for 2021. Our target price for Frencken implies 12x 2021F P/E.
- See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.
- We believe there is also room for further re-rating, as peers are trading at higher valuations. We remain positive on Frencken’s long-term prospects and its management team and retain our BUY recommendation.
- Key risks include an economic slowdown and customers delaying orders.
- Frencken is also one of RHB's prefer stocks in tech manufacturing sector for 2021. See: Singapore Market Strategy - RHB Invest 2020-12-14: Key Themes In 2021 & Stock Picks.
Jarick Seet
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-12-24
SGX Stock
Analyst Report
1.37
UP
1.220
