Frencken Group Ltd: Navigating Market Headwinds and Opportunities
Broker: CGS International Securities
Date: November 1, 2024
Introduction
In this comprehensive analysis, we delve into the performance and outlook for Frencken Group Ltd, a leading provider of original design, original equipment, and diversified integrated manufacturing solutions. Despite facing significant market headwinds from key customers, there remain areas of potential growth and strategic opportunities. This report aims to provide an in-depth look at the company’s current standing and future prospects.
Negative Read-Throughs from Key Customers
Frencken Group is currently facing negative read-throughs from three of its major customers, leading to a forecasted contraction in FY25F revenue. Consequently, the FY25F revenue forecast has been reduced by 1.15%, resulting in an 8.64% decrease in the FY25F EPS forecast. The target price (TP) has been adjusted downwards from S\$1.70 to S\$1.55, maintaining the valuation basis of 14.1x FY25F P/E.
Semicon Recovery Still Patchy
Raymond James, our US partner, recently lowered its base case FY25F revenue growth forecast for wafer fab equipment from high-single-digit to mid-single-digit. ASML, a key semicon customer for Frencken, expects its revenue from China to normalize to 20% of its FY25F total revenue due to potential additional export controls and delays in fab investments. This could impact Frencken’s FY25F semicon revenue, given that the semicon segment accounted for 42.1% of its 1H24 revenue.
Analytical Life Sciences Demand Muted
The analytical life sciences segment, which accounted for 24.4% of Frencken’s 1H24 revenue, is also experiencing muted demand. Thermo Fisher, a significant customer in this segment, highlighted that economic activity in China was subdued, with hopes that government stimulus might boost demand in FY25F.
Medical Segment Facing Short-Term Headwinds
The medical segment, contributing 16.6% of Frencken’s 1H24 revenue, is also facing challenges. Philips Healthcare reported flat sales and decreased orders in 3Q24, attributing it to deteriorating demand from hospitals and consumers in China. The company expects market conditions to remain uncertain due to industry-wide anti-corruption measures and the ongoing impact of the national renewal programme.
Reiterate Add but Lowering TP to S\$1.55
Despite the challenges, we reiterate our Add call on Frencken, as we anticipate an order recovery among its semicon customers, albeit delayed, which could lead to core EPS growth resuming in FY25-26F. The TP is reduced to S\$1.55 due to the revised FY25 EPS. Potential re-rating catalysts include a faster recovery in the semicon business segment driven by new end-consumer products, better cost controls, and greater concessions from customers on cost pass-throughs. Downside risks include further cost escalation and weakening demand in the semicon business segment.
Financial Summary
| Metric |
2022 |
2023 |
2024F |
2025F |
2026F |
| Revenue (S\$m) |
786.1 |
742.9 |
770.3 |
821.6 |
874.1 |
| Net Profit (S\$m) |
51.87 |
32.47 |
43.60 |
46.96 |
54.70 |
| Core EPS (S\$) |
0.12 |
0.08 |
0.10 |
0.11 |
0.13 |
| Core EPS Growth |
(11.7%) |
(37.4%) |
34.3% |
7.7% |
16.5% |
| FD Core P/E (x) |
9.63 |
15.39 |
11.46 |
10.64 |
9.14 |
Peer Comparison
| Company |
Recommendation |
Closing Price |
Market Cap (US\$ m) |
P/E (2024F) |
P/E (2025F) |
Dividend Yield |
| Benchmark Electronics |
Not Rated |
43.30 |
1,563 |
20.1 |
18.0 |
1.5% |
| Celestica Inc |
Not Rated |
68.40 |
7,957 |
17.8 |
15.4 |
NA |
| Flex Ltd |
Not Rated |
34.67 |
13,444 |
15.0 |
12.8 |
NA |
| Malaysian Pacific Industries |
Reduce |
26.00 |
1,122 |
33.5 |
24.1 |
1.3% |
| SAM Engineering & Equipment |
Hold |
4.28 |
662 |
23.5 |
17.1 |
0.8% |
| Sanmina Corp |
Not Rated |
70.10 |
3,831 |
13.4 |
12.1 |
NA |
| Unisem |
Reduce |
3.03 |
1,116 |
30.7 |
24.0 |
2.6% |
| UWC BHD |
Not Rated |
2.35 |
586 |
170.3 |
31.4 |
0.3% |
ESG Highlights
Frencken Group emphasizes the importance of a robust governance structure for long-term prosperity. Guided by the Code of Corporate Governance (2018 Code) issued by the Monetary Authority of Singapore, Frencken is committed to upholding high standards of corporate governance. The company has introduced the ESG (FSL) Dashboard to collate data from all operating sites, aiming to meet 74% of its ESG targets, with ongoing efforts to improve the remaining 26%.
Customer Concentration Risk
Frencken’s customer concentration risk is evident, with three key customers accounting for approximately 49.4% of its FY23 group revenue. However, this risk is mitigated by its diverse exposure to other business segments and continuous efforts to recruit new customers.
Occupational Safety and Health (OSH)
Frencken has established OSH policies and a safety and health committee within its various entities, comprising representatives from both executive and non-executive staff. The company is developing better training tools and methods to enhance workplace safety. Notably, there were no workplace injuries reported in 2023.
By the Numbers: Financial Performance
| Metric |
2022 |
2023 |
2024F |
2025F |
2026F |
| Revenue Growth |
2.48% |
(5.50%) |
3.69% |
6.67% |
6.39% |
| Operating EBITDA Growth |
(5.9%) |
(20.5%) |
26.1% |
5.0% |
8.9% |
| Operating EBITDA Margin |
10.5% |
8.8% |
10.7% |
10.6% |
10.8% |
| Net Cash Per Share (S\$) |
0.14 |
0.12 |
0.34 |
0.42 |
0.49 |
| BVPS (S\$) |
0.93 |
0.95 |
1.02 |
1.10 |
1.19 |
| Gross Interest Cover |
13.01 |
5.89 |
8.64 |
11.29 |
12.84 |
| Effective Tax Rate |
18.1% |
23.0% |
17.0% |
19.3% |
17.0% |
| Net Dividend Payout Ratio |
30.0% |
30.0% |
30.0% |
30.0% |
30.0% |
| Accounts Receivables Days |
57.23 |
72.33 |
70.75 |
55.12 |
52.38 |
| Inventory Days |
123.3 |
128.3 |
109.1 |
95.2 |
95.1 |
| Accounts Payables Days |
65.74 |
69.20 |
67.55 |
59.57 |
59.48 |
| ROIC (%) |
17.9% |
9.4% |
12.9% |
16.6% |
19.0% |
| ROCE (%) |
11.2% |
7.3% |
10.3% |
10.6% |
11.3% |
| Return On Average Assets |
7.82% |
5.04% |
6.58% |
6.67% |
7.27% |
Key Drivers
Frencken’s revenue growth and profitability are influenced by several key drivers across its business segments. The industrial automation revenue, semiconductor revenue, and other segments play pivotal roles in the company’s overall performance.
Conclusion
Frencken Group Ltd is navigating a complex market environment with both challenges and opportunities. While key customer read-throughs indicate short-term headwinds, the company’s strategic initiatives and diversified business segments provide a foundation for potential growth. Investors should closely monitor the developments in Frencken’s key markets and segments to make informed decisions.
