Date: October 14, 2024
Broker: Maybank Research Pte Ltd
Overview of Frencken Group Ltd
Frencken Group Ltd (FRKN SP) is a Singapore-based technology hardware manufacturer specializing in the production of high-mix, low-volume, high-complexity components and modules. The company serves various industries, including semiconductors, life sciences, industrial automation, automotive, and medical technology. It is known for its strong relationships with customers, many of which have lasted for decades. Frencken’s offerings are tailored to provide value-added solutions to its clients, which in turn drives better margins for the company.
Positive 2H24 Outlook and Earnings Forecast
Despite some challenges, Maybank maintains a BUY recommendation for Frencken with a revised 12-month price target of SGD 1.54, which is a 25% upside from its current share price of SGD 1.27. Frencken is expected to see stronger profitability in the second half of 2024, although growth in the life sciences segment is expected to be slower than initially projected.
- Current Share Price: SGD 1.27
- 12-Month Price Target: SGD 1.54
- Previous Price Target: SGD 1.77
While Frencken is anticipated to benefit from higher margins due to operating leverage and increased semiconductor revenue, its expected ramp-up in semiconductor orders is now forecasted to occur in 2Q-3Q 2025 instead of earlier projections.
Semiconductor and Life Sciences Sector Performance
Frencken’s semiconductor segment has been a significant contributor to its performance. In 1H24, the gross margin increased from 12.3% to 14.8%, while the net margin rose from 1.5% to 4.8%. This improvement was driven by better operating leverage and higher margins in the semiconductor segment. However, the ramp-up in orders, which was initially expected in 2024, is now projected to take place in 2Q-3Q 2025.
The life sciences segment, which saw robust growth during the COVID-19 pandemic, is beginning to show signs of slowing down. Despite this, Frencken continues to see growth potential in this area, albeit at a slower pace than previously expected.
Financial Performance and Key Metrics
- Revenue Forecast: SGD 780M in FY24, increasing to SGD 987M in FY26
- Core Net Profit (SGD M): 42.6 in FY24, projected to rise to 59.2 in FY26
- Core FDEPS Growth: 31.1% in FY24, 15.8% in FY25, 20.2% in FY26
- Net Dividend Yield: Expected to rise from 2.4% in FY24 to 3.3% in FY26
- Core FD P/E (x): 12.8 in FY24, 9.2 in FY26
Industry Outlook and Risks
Frencken is a key player in the semiconductor and industrial automation markets. While growth in the semiconductor industry has faced delays, Frencken remains well-positioned to capitalize on the anticipated recovery starting in 2025. Additionally, its automotive and industrial automation businesses are expected to contribute to revenue growth in the coming years. The company’s financial resilience is supported by a strong cash flow and a net cash balance sheet, which is expected to provide stability amid ongoing economic uncertainty.
Potential Upside Factors:
- Stronger-than-expected contributions from the semiconductor and industrial automation sectors
- Increased margins from new product introductions and operational efficiencies
- Higher institutional interest, potentially driving the stock’s re-rating
Risks:
- A drop in demand or further delays in the semiconductor industry recovery
- Supply chain disruptions that could impact production and revenue
- Lower-than-expected dividend payouts
Environmental, Social, and Governance (ESG) Considerations
Frencken has been actively improving its environmental and governance practices. The company’s proprietary eco-PVD coating technology is seen as more environmentally friendly compared to traditional methods. While the company does not currently use recycled materials, this could change based on customer requirements.
- Environmental Compliance: In 2021, Frencken had zero fines or sanctions related to environmental regulations.
- ESG Score: 41 (below average). While the company has an established ESG framework, there is room for improvement, particularly in disclosing greenhouse gas emissions and increasing the use of recycled materials.
Valuation and Analyst Recommendations
Maybank maintains Frencken as its Top Pick in the Singapore technology sector, emphasizing its potential to benefit from the semiconductor industry’s recovery. The stock is viewed as undervalued, with a solid growth trajectory in the coming years, despite some short-term challenges.
