Frencken Group - UOB Kay Hian 2021-10-14: Structural Growth Story Intact; Maintain BUY

FRENCKEN GROUP LIMITED (SGX:E28)

Frencken Group - Structural Growth Story Intact; Maintain BUY

High-tech component manufacturer Frencken is a longer-term beneficiary of positive trends in the technology sector. With a diverse blue-chip clientele, its earnings should be more stable than its peers’ amid the ongoing disruptions brought about by the COVID-19 pandemic, which has impacted manufacturing plants worldwide.
Frencken’s EPS is expected to grow at a 24% CAGR over 2020-23. Maintain BUY.

Revenue stream from multiple industries. Frencken (SGX:E28) serves leading corporations across multiple industries, a wide range of end-user markets and different geographical regions.
Structural growth drivers in the semiconductor sector intact. Frencken is in a good position to ride the positive market trends in 5G, Internet of Things and artificial intelligence. Core competencies such as being able to develop motor functions within a vacuum environment and helping clients improve their engineering processes give Frencken the edge to serve as a supplier of key components and provider of modular parts for a wide range of industries.
Growth likely to continue even into 2022. Through discussion with clients, management believes that growth of the semiconductor industry will likely continue even into 2022 before any tapering in 2023-24. Management does not foresee growth to have peaked.
Strong balance sheet to support further EPS growth and dividend payouts. A net cash pile of S$57.9m constitutes 6.5% of Frencken's market cap. This includes the S$14m acquisition of Avimac Pte Ltd, an aerospace and semiconductor-focused company. Frencken has also rewarded shareholders with a consistent dividend payout ratio of > 30% of net income ever since its listing in May 05, despite not having a formal policy in place.

Power shortage in China has no region. This compares to the 15.2-16.9% range in 2016-19, with the increase due to the higher share of the more profitable semiconductor segment from 16% in 2016 to an estimated 40% in 2022 (2020: 30%). Additionally, ongoing group-wide cost-cutting measures and efficiency improvements such as upgrading of equipment and facilities are expected to improve operating margins, further bolstering bottom line.

No changes to valuation is supported by its strong earnings growth profile, with EPS CAGR estimated at 24% over 2020-23.
See
Catalysts for Frencken's Share Price
- Higher-than-expected factory utilisation rates.
- Better-than-expected cost management.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-10-14

SGX Stock Analyst Report BUY MAINTAIN BUY 2.620 SAME 2.620