Frencken Group - DBS Research 2021-02-26: Semiconductor Continues To Shine


Frencken Group - Semiconductor Continues To Shine

  • Frencken's FY20 results in line, supported by semiconductor division.
  • Margin improvement despite impairment loss.
  • Expect semiconductor and medical segments to register higher revenue in 1H21 vs 2H20, flat for analytical and automotive, and lower for industrial automation.
  • Maintain BUY with higher target price of S$1.55.

Frencken's FY20 results in line, supported by semiconductor division

  • Frencken (SGX:E28)’s FY20 total revenue eased 5.8% y-o-y. Except for the semiconductor segment, Frencken’s other business segments recorded lower sales due to business disruptions and slower economic conditions caused by the COVID-19 pandemic.
  • For 2H20, total revenue softened 2.3% y-o-y but was up 12.2% h-o-h to S$328.1m on the back of a gradual recovery in business conditions.
  • Semiconductor shines. The semiconductor segment’s sales grew 60.7% y-o-y to S$186.3m in FY20 and accounted for 30% of total revenue. Frencken recorded higher orders for both front-end and back-end semiconductor equipment from customers in Europe and Asia, reflecting the strength of the global semiconductor industry amid the COVID-19 pandemic.
  • Medical weaker on slower order flows. Sales of the medical segment softened 2.1% y-o-y to S$85.1m in FY20, attributable mainly to slower order flows from a key customer in Europe during 2H20.
  • Analytical weaker. The decline in Analytical segment’s sales was due primarily to lower demand from customers in Europe.
  • Industrial Automation also weaker. Sales of the Industrial Automation segment fell 36.2% y-o-y to S$118.9m in FY20 due to lower shipments of storage drive production equipment to a key multinational customer.
  • Automotive improved in 2H20. The automotive segment experienced a significant sales decrease during 1H20, affected by lockdowns as well as an overall slowdown in end-user demand. In 2H20, the automotive segment’s sales recovered to S$46.2m, up 49.3% h-o-h, as orders from customers gradually improved.

Margin improvement despite impairment loss.

  • Frencken recorded an exceptional loss of S$6.2m in FY20. This was in respect of an impairment loss of deferred development costs in Frencken Europe B.V., which is an operating unit within the Mechatronics Division.
  • Despite the impairment loss, net margin improved to 6.9% from 6.4% in FY19. Excluding the exceptional loss, net margin would be 7.9%.

Frencken's outlook for 1H21:

  • Semiconductor and Medical divisions are expected to record higher revenues in 1H21 vs 2H20;
  • Analytical and Automotive flat, while
  • Automotive could see potential upside as estimated from customers’ programs;
  • Industrial Automation division weaker.

Tweaked earnings higher on better margins.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.55 UP 1.510