Frencken Group - CGS-CIMB Research 2021-03-26: 2021 Would Be A Semicon Driven Year

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - 2021 Would Be A Semicon Driven Year

We see Frencken benefitting from the strong outlook for the semiconductor industry over 2020-2022F.
The long-term demand driver for its industrial automation segment remains intact.
Reiterate ADD on Frencken with a higher target price.

In its quarterly World Fab Forecast report (Mar 2021), Semiconductor Materials and Equipment International (SEMI) projected that fab equipment spending in the global semiconductor industry grew 16% y-o-y in 2020, and such growth will continue at a projected 15.5% in 2021F and 12% in 2022.
On 23 Mar 2021, Intel announced plans to build two new wafer fabs in the US for an estimated US$20bn. The company also commented that within 2021, it will announce further capacity expansion in the US/Europe or other global locations.

As ASML (ASML US) is the world’s leader in Extreme Ultraviolet Lithography (EUV) technology, we expect it to be a key beneficiary of the growth in fab equipment spending. ASML’s EUV unit shipments have increased from 18 units in 2018 to 31 units in 2020.
Intel will be outfitting its planned new US fabs with EUV machines. In addition, memory makers are also warming up to the usage of EUV tools in their production process and ASML believes they will adopt EUV tools in late-2021 to 2022.
As ASML is a key customer of Frencken (SGX:E28)’s semicon segment (30% of FY20 revenue), this will support the latter’s earnings outlook for FY21-22F, in our view.

Seagate Technology (STX US), the key customer in Frencken’s industrial automation business segment (19% of FY20 revenue) remains committed to its plan to introduce its new higher capacity Heat Assisted Magnetic Recording (HAMR) Hard Disk Drives (HDD). Such drives of 20 Terabyte (TB) capacity have been on trial with customers in 2020.
Seagate plans to launch 50TB versions of such drives by 2026. We believe this technology change would require capex on Seagate’s part, benefitting Frencken.

We raise our target P/E on Frencken to 13.8x (in line with the FY22F sector average of tech stocks under our coverage) as the market warms up to the optimistic earnings prospects for Singapore tech stocks. Previously, we used 12.0x (12.4% discount to the sector average P/E multiple then).
See Frencken Share Price; Frencken Target Price; Frencken Analyst Reports; Frencken Dividend History; Frencken Announcements; Frencken Latest News.
Downside risks are order pullbacks by customers, while re-rating catalysts could come from new customer wins and stronger-than-expected sales in the industrial automation segment.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-26

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