Frencken Group - Maybank Kim Eng 2021-03-14: Thesis Playing Out

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Thesis Playing Out

Frencken (SGX:E28)’s cyclical and structural prospects remain attractive. As it executes on delivering a breadth of new products with greater value-add in coming years, we see upside potential to net margins.
Alongside, institutional interest have been rising as the investment thesis plays out.
We raise our target price of Frencken to S$1.74, now based on 14.5x FY21E P/E (+2 standard deviation above 10-year mean), from ROE-g/COE-g-derived 1.6x FY21E P/B previously, to account for longer-term potential of better than expected margins.

Frencken expects new product introductions in medical and analytical segments in FY21E, of which in some Frencken have increased value-add materially. As elective surgeries return, Frencken expects orders deferred from last year to be realised this year. Semiconductor visibility also appears strong through the entire year. Of the S$23.7m spent on capex in FY20, around 80% was purposed for semiconductor requirements.

Our/consensus’ net margin assumption are 7-8% for FY21-23E. As Frencken increases its value-add with customers over the next few years through a breadth of new products, we see upside potential.
IMS segment margins were 5%/8% in FY19-20, a large improvement from 1% in FY17-18, largely driven by continued cost improvements. We believe as Frencken’s proprietary eco-PVD and filters in the automotive sub-segment grow in future years, these could be a further driver of IMS margins.

See Frencken Share Price; Frencken Target Price; Frencken Analyst Reports; Frencken Dividend History; Frencken Announcements; Frencken Latest News.
We believe valuation at +2 standard deviation above 10-year mean is not onerous. Frencken’s historical multiples may not be fully indicative of future potential, as since 2015, current management have turned around the company, and have set the foundation to drive growth from a breadth of new products with greater value add.
Yet, our valuation of 14.5x FY21E P/E for Frencken is still a discount to what consensus is inferring for Venture Corp (SGX:V03) (18x), which we see is warranted as Venture Corp is larger and more diversified.
Key risks are:
1. our overestimation of industrial automation growth in FY21E, and/ or
2. weaker-than-expected volumes, due to either still difficult business conditions/ risks of shortages in the supply chains.