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

FRENCKEN GROUP LIMITED (SGX:E28) | SGinvestors.io 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.



UOB Kay Hian hosted Frencken Group at its annual Asian Gems Conference.

  • 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.

STOCK IMPACT

  • 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.


VALUATION/RECOMMENDATION






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



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