Semiconductor stocks are gaining traction as the industry upcycle presents itself. Maybank KE has just initiated coverage of Frencken Group, following a number of reports on the industry such as: 

» Semiconductor Plays Amongst Singapore’s Most Traded in 2020 YTD

» "Still Bullish On Semiconductors; Still OVERWEIGHT"

» DBS' tech stock picks: AEM, UMS, Frencken, DELTA

Excerpts from Maybank KE report

Analyst: Gene Lih Lai, CFA

Quality growth, diversity and margins; initiate BUY

Frencken manufactures components and modules for market leaders leveraged to growth trends in 5G/ AI, health and wellness and population aging.


Share price: 


Our FY21-22E PATMI are 14% higher vs. Bloomberg consensus, as we believe margin uplift potential from a breadth of new products with higher design content is underappreciated.

Geographic and product diversity, as well as net cash-to-equity position of 23% should offer resilience amid Covid-19.

Initiate BUY with ROE-g/COE-g TP of SGD1.20 (1.6x FY20E P/B).

Growth through market-leading customers
In mechatronics (82% of revenues), Frencken’s market-leading customers include ASML, Seagate, Thermo Fisher and Philips.

Mechatronics products tend to be critical, have demanding requirements, and Frencken is usually the sole source.

Frencken is currently involved with a breadth of new products across semiconductor, analytical, medical and more.

Resilient to Covid-19 and US-China tension
Current demand disruptions are largely due to order or receipt delays and cancellations are not material.

Lai Gene Lih"We estimate 46% of Frencken’s revenue are leveraged to secular technology trends such as cloud, 5G and AI (through the semiconductor and industrial automation subdivisions) while 33% of revenue are linked to trends relating to health and wellness, and population aging (through the medical and healthcare segments)."

-- Gene Lih Lai, CFA

Customers like Philips and Thermo Fisher expect the resumption of elective surgeries and lab work to reinvigorate sales; Semiconductor is benefitting from strong cloud demand.

All factories are now operating as usual. We see resilience to US-China tensions, given:

i) Frencken predominantly serves domestic supply chains and/or markets; and
ii) China accounts for only 15% of sales.
Frencken europe youtubeFrencken is a contract manufacturer that provides end-to-end solutions from product conceptualisation and design to volume manufacturing and logistics services. Its key segments are mechatronics and integrated manufacturing services (IMS). Photo: YouTube

Swing factors
We expect FY20E PATMI to fall 11% YoY before rebounding by 10-17% in FY21-22E.

We expect core NPM to improve to 7.7% by 2022 from 7.1% in 2019.

If i) industrial automation and semiconductor sales are stronger than expected and ii) net margin hits 9% by 2022E, we see bull-case fair value of SGD1.45.

However, if i) protracted economic weakness erodes demand resilience; and ii) supply chain disruptions recur, we estimate bear-case fair value of SGD0.95 – suggesting an attractive margin of safety

Full report here.

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