Frencken Group - UOB Kay Hian 2021-05-14: 1Q21 Positive Operating Leverage From Semiconductor Segment To Continue

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - 1Q21 Positive Operating Leverage From Semiconductor Segment To Continue

Frencken's 1Q21 results were a slight beat, with earnings of S$14.7m (+54.7% y-o-y) accounting for 29% of our full-year estimate. Revenue for the semiconductor segment (+58.0%) continued to drive positive operating leverage and would remain so throughout the year, based on current demand indications from key customers.
Maintain BUY with a target price of S$1.72.

Frencken (SGX:E28)’s 1Q21 net profit of S$14.7m (+54.7% y-o-y) was led by gross margin expansion, accounting for 29% of our 2021 earnings estimate of S$49.9m. Revenue rose to S$181.5m (+19.9% y-o-y) from broad-based growth across the semiconductor (+58.0%), analytical (+11.0%) and medical (+5.7%) segments, but was partially offset by slower sales in industrial automation (-2.1%).
The strong growth from the semiconductor segment drove the expansion in group gross margin to 17.3% (1Q20: 15.6%), as well as improved operational efficiencies.

The strong demand outlook for 1H21 relative to 2H20 was maintained, led by higher expected sales from the semiconductor, medical and analytical segments. However, revenue from the industrial automation and automobile segments are anticipated to soften indicatively h-o-h.

In the recent response from management to questions from shareholders for the AGM, Frencken highlighted that the present chip shortage situation in the semiconductor industry is driving demand for both front-end and back-end semiconductor equipment. This bodes well for the Frencken’s customers and in turn should benefit the group’s semiconductor segment.
Furthermore, current indications and outlook of Frencken’s key customers in the semiconductor industry cited that demand for equipment is likely to be sustained in 2021.

Frencken’s on-going improvement of operational efficiency continues to show progress, and is expected to further bolster EBITDA margin going forward. Since implementing the Frencken Operations eXcellence and Frencken Production System programmes in 2017, operational efficiency has improved.
Over the three years between 2017 and 2020, Frencken's EBITDA saw a marked improvement of 20.5% CAGR, on the back of a 6.4% revenue CAGR over the same period, due to better operational efficiency. While the 1Q21 business update did not provide any details on EBITDA, we believe the quarter’s EBITDA margins to be stable at the 12.5-13.0% region, compared with the sub-10% region between 2014 and 2018.

Frencken is deepening its core competency to provide unique components, modules and designing of a whole product. The group has been moving away from the built-to-print model, ie contract manufacturing, which does not add much value to its clients.

Maintain BUY with target price of S$1.72 for Frencken, pegged to 14.7x 2021F P/E, or 1.5 standard deviation above its historical mean, which we believe to be reasonable amid the cyclical upturn in the semiconductor sector. At the current price, Frencken trades at 12.1x 2021F P/E.
See

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-14

SGX Stock Analyst Report BUY MAINTAIN BUY 1.720 SAME 1.720