Excerpts from UOB Kay Hian report

Analyst: Clement Ho

Resilient, Stable Portfolio Stands Out In Tough Times

High-tech component manufacturer Frencken is a longer-term beneficiary of positive trends in the technology sector.


Share price: 
86 c


With a diverse blue-chip clientele, its earnings should be more stable than peers’ amid the temporary slowdown brought about by the Covid19 pandemic, which has affected manufacturing plants worldwide.

Initiate coverage with BUY and target price of S$1.15.

Revenue stream from multiple industries. Frencken Group (Frencken) serves leading corporations across multiple industries, a wide range of end-user markets and different geographical regions.

Top- (+5.6%) and bottom (+41.1%) lines delivered healthy performances amid tumultuous business conditions in 2019. For the year, we expect a slight revenue contraction of 6.4% as the healthy demand growth from the semiconductor business would be offset by the worsening dynamics in the automobile industry.

A resumption of orders in the company’s analytical and industrial automation subdivisions is expected to lift 2021-22 top-lines by 8.7% and 9.5% respectively.

Frencken europe youtubeFrencken is a leader in the field of electro-mechanical assemblies and modules for electron optics and ion optics in applications like scanning electron microscopes (SEMs) and mass spectroscopy.

Longer-term beneficiary of positive tech sector trends. Frencken is in a good position to ride the positive market trends in 5G, Internet of Things and artificial intelligence.

As a component supplier and provider of modular parts for companies in industries such as analytical & life sciences, healthcare and industrial automation, the group will benefit from higher demand for parts as the technology trends evolve towards mass consumption.

Solid recovery in 2021

Short-term weakness in net profit. Amid order push backs and supply chain disruptions due to the Covid-19 pandemic, Frencken’s 2020 net profit is expected to fall 8.3% to S$38.8m. However, the favourable business mix would position the group for a solid recovery in 2021-22, with bottom line growth of 5.7% and 25% respectively on improved operating leverage."

-- UOB KH report

Taking operational efficiency to the next level. Despite expected lower sales in 2020, operating margin should normalise above the 11% range, compared with the sub-9% region in 2014-17, due to cost-cutting measures and efficiency improvements.

Management is still making investments to upgrade its equipment and facilities.

Supportive balance sheet to weather volatile conditions. As at end-1Q20, its net cash pile of S$92.9m, or 25% of market cap, should help weather any uncertainties in the current demand environment due to the Covid-19 outbreak.

Past the volatile period, we believe Frencken would emerge with a leaner cost structure, which translates into greater operating leverage as revenue normalises.

Shareholders should be rewarded with a consistent dividend payout ratio of >30% of net income, which Frencken has made ever since its listing in May 05.

Initiate coverage with BUY and target price of S$1.15, pegged to 12.6x 2020F PE, in line with that of SGX-listed peers, and implies 5.7x EV/EBITDA.

We believe current valuations are attractive, given the exposure Frencken has to favourable market trends in the technology sector.

Assuming a 30% payout ratio, the anticipated 2020F/21F DPS of S$0.0275 and S$0.029 would translate to yields of 3.2% and 3.4%, respectively.

Frencken currently trades at 9.4x 2020F PE and 4x EV/EBITDA

Full report here. 

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