FRENCKEN GROUP LIMITED (SGX:E28)
Frencken Group - Stars Are Aligned
Investment case: cyclically and structurally aligned
- We favour Frencken (SGX:E28) both cyclically and structurally. Cyclically, ~70% of revenues (e.g. semicon, medical, analytical, etc) are in various stages of upswing. Structurally, the company continues to deepen value-add with customers, which should translate into a breadth of products that commands better margins over the next several years.
- Our target price for Frencken is based on 14.5x FY21E P/E. BUY.
Catalysts: robust demand from several sub-segments
- We see catalysts for Frencken from stronger-than-expected momentum in:
- semiconductor equipment (amid chipmakers’ capex upswing and chip shortages);
- medical (deferred orders from last year to be realised this year amid a recovery of elective surgeries); and
- industrial automation (if key HDD customer has to materially expand capacity amid current HDD shortages).
- Stronger-than-expected margin expansion momentum, driven by favourable product mix and cost control, may also be a catalyst.
Valuations: further re-rating on rising insti interest
- Frencken's share price is trading at 12.5x FY21E P/E, and our target price is based on 14.5x FY21E P/E (+2 standard deviation above 10-year mean). We believe our target price is not onerous, as:
- SG-listed technology peers are trading at around 15x FY21E P/E; and
- Frencken’s earnings quality has improved remarkably since current CEO Dennis Au joined in 2015.
- Furthermore, we do not rule out further re-rating as institutional interest in Frencken continues to build.
Risks: components shortages a double-edged sword?
- Given the robust outlook across multiple sub-segments, and because we see Frencken as a net beneficiary of components shortages via its semicon and HDD sub-segments, we are currently less concerned with components shortages curtailing recovery momentum in the auto sub-segment.
- However, a material worsening of components shortages could create bottlenecks in medical and analytical supply chains, which may slow down Frencken’s growth momentum. A material worsening of the COVID-19 situation in Malaysia and India may also pose risks to production.
- See
- Frencken (SGX:E28) is one of the participating companies of Invest ASEAN 2021 by Maybank Kim Eng.
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2021-06-21
SGX Stock
Analyst Report
2.000
SAME
2.000
