FRENCKEN GROUP LIMITED (SGX:E28)
Frencken Group - Proxy To Semiconductor Boom
- Beneficiary of global supply chain and secondary sourcing;
- Riding the semiconductor uplift;
- Positive outlook.
Frencken - Company Profile
- Frencken (SGX:E28) is a global integrated technology solutions company that serves world-class multinational firms in the automotive, healthcare, industrial, life sciences, and semiconductor industries. Frencken has operations in 17 sites across Asia, Europe, and the US, and has 3,500 employees. The two main business segments are mechatronics and integrated manufacturing services (IMS).
Frencken - Investment Highlights
Medical and semiconductor segments continue to enjoy strong growth.
- Frencken still enjoys larder medical orders relating to CT scan and other scanning related equipment. Its clients have also reduced the number of manufacturers and given larger orders and new products to retained manufacturers, which in turn, should yield higher margins – Frencken is one such beneficiary, and hence, it looks to ramp up in FY21F.
- Management remains bullish also on its semiconductor segment. All areas of this segment will likely grow strongly y-o-y in FY21F and management is bullish that the strong growth ought to continue across the various business sub-segments in the semiconductor space.
Automotive to be stronger y-o-y despite chip shortage.
- The global automotive chip shortage was due to a lack of orders placed forward due to the downtown in the automotive sector in 2020 and chips were allocated to other sectors as a result. Management is optimistic that this situation will be easily resolved and volume will resume, reaching higher levels even due to the stronger demand.
Further upside to share price despite great performance.
- Due to the delay in Frencken’s industrial automation segment, we believe FY21 will be a strong year for the group, where both its semiconductor and medical segments should drive profit upwards.
- Previously, its key customer in the industrial automation segment delayed its new product launch due to supply chain issues. Growth will depend on its end customer, which just launched a new product but has yet to ramp up production. Management is casually optimistic but it will be highly dependent on its clients and reception of this product.
- All in, we believe there is also room for further re-rating, as peers are trading at higher valuations. We are also confident of Frencken’s long-term prospects and its management team. As such, we retain our BUY recommendation.
Frencken - Company Report Card
Latest results.
- Frencken's FY20 revenue eased 5.8% y-o-y to S$620.6m due to lower sales contributions from both the mechatronics and IMS divisions. With the exception of the semiconductor segment, the other business segments recorded lower sales due to business disruptions and slower economic conditions caused by the COVID-19 pandemic. PATMI was 0.5% better due to government grants as well as cost streamlining.
Balance sheet/cash flow.
- As at end-FY20, Frencken’s net cash position was close to S$149m, built up steadily by its positive operating cash flow.
ROE.
- Frencken's ROE remained stable and should continue to grow steadily in the next few years. We expect ROE to improve from its 13.6% level in FY20.
Dividend.
Management.
- Dennis Au is Frencken’s President and Executive Director. He was appointed as President on 5 May 2015 and the other position on 28 Apr 2016. Au has over 30 years of experience in the high-tech industry. He is responsible for setting the group’s strategic direction and overseeing its global operations. Au graduated from the National University of Malaysia with a Bachelor of Engineering (Electronic, Electrical, and Systems).
Frencken - Investment Case
Maintain BUY with a target price of S$1.77.
- We remain positive on Frencken’s prospects and peg our target price to a higher multiple of 14x due to the general rerating of technology stocks globally.
- See
- We remain confident that Frencken will enjoy an excellent FY21F – it remains one of the main proxies for the semiconductor growth in Singapore’s listed space.
- Potential of earnings re-rating exists if its automotive as well as industrial automation surprise on the upside with new projects.
- Frencken (SGX:E28) is one of the Top Singapore Small Cap Companies highlighted in RHB's 20 Jewels 2021 Edition.
Jarick Seet
RHB Securities Research
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https://www.rhbinvest.com.sg/
2021-05-05
SGX Stock
Analyst Report
1.77
SAME
1.770
