FRENCKEN GROUP LIMITED (SGX:E28)
Frencken Group - Upward Re-rating To Continue On Structural Improvement
- We believe the continued uptick in factory utilisation rates is sustainable, supported by strong demand seen by key clients of Frencken, including industry heavyweight ASML Holding.
- Frencken's revenue is expected to continue growing 7.4-13.8% over 2021-23, translating to a 3-year earnings CAGR of 15.5% on the back of positive operating leverage. We see bright spots emerging in the industrial automation segment.
- Maintain BUY call on Frencken with a higher target price of S$2.13.
WHAT’S NEW
Major customers seeing orders ramp up.
- Key clients of Frencken Group (SGX:E28) in the semiconductor and medical & analytical segments, namely ASML Holding (ASML NA), Thermo Fisher Scientific (TMO US), Koninklijke Philips NV (PHIA NA) and Siemens Healthineers (SHL GR), have continued to see an increase in orders. ASML is benefitting from the 5G digital infrastructure build-up, while the others are seeing order resumption following push-backs related to uncertainties surrounding the COVID-19 pandemic.
- Accounting for a combined 65% of Frencken’s 2021 revenue, the semiconductor segment (34%) and medical & analytical segments (31%) are not expected to present any negative surprises in the upcoming 1H21 results in mid-Aug 21.
Bright spots emerging in industrial automation.
- Global demand for hard disk drives (HDD) is expected to increase over 2021-25, according to International Data Corporation (IDC). Both industry heavyweights Seagate Technology Holdings (STX US) and Western Digital Corp (WDC US), have seen accelerating growth year-to-date on the back of high demand for storage. Hence, we believe there is increasing potential for Frencken’s industrial automation segment to surprise on the upside in 2H21, as improved industry conditions should lead to higher capex budget for key customer Seagate.
- Frencken builds the modular parts of the HDD assembly line for Seagate, and also manufactures the sheet metal in-house. Typically, Frencken will receive orders 3-6 months ahead, and have a delivery lead time of a month.
STOCK IMPACT
Share price correlation with clients to continue.
- The 7-year historical share prices of Frencken and two key clients, ASML and TMO, have shown a strong correlation of 0.79 and 0.78 respectively. Interestingly, revenue trend is higher at 0.94 and 0.87, respectively.
- Taking cue from consensus 2021/22F sales growth of 28.4%/13.8% and 10.9%/12% for lieve our revenue forecast of 13.8%/7.4% is well supported.
EARNINGS REVISION/RISK
- No changes to our forecasts.
VALUATION/RECOMMENDATION
Maintain BUY with higher target price of S$2.13.
- We have raised the valuation peg to 18.2x 2021F P/E, or 20% discount to the blended average 2021F P/E range of Frencken’s key customers. Relative to Frencken's historical share price, the implied target price falls between its +2.5 standard deviation and +3 standard deviation of 17.8x and 19.4x 2021F P/E respectively.
- We believe Frencken’s valuation would continue to re-rate upwards, in tandem with the cyclical upturn across the semiconductor, industrial automation and medical & analytical segments.
- See
SHARE PRICE CATALYST
- Higher-than-expected factory utilisation rates.
- Better-than-expected cost management.
Clement Ho
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-06-22
SGX Stock
Analyst Report
2.13
UP
1.720
