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Brokers' take: Frencken's improved margins to continue in FY2020

ANALYSTS expect Frencken Group's improved margins to be sustained after the semiconductor play reported FY2019 net profit that came in 19 per cent above Bloomberg consensus estimates.

Last Thursday after market close, Frencken reported a 1 per cent increase in Q4 net profit to S$11.2 million. But core net profit for the period ended Dec 31, which strips out a S$4.2 million impairment loss, was 42 per cent higher at S$15.4 million.

The company's increase in gross profit margin to 18.9 per cent lifted its core net profit for Q4.

For the full year, an improvement in gross profit margin to 16.9 per cent from 16.3 per cent in FY2018 saw net profit jump 41.1 per cent to S$42.4 million. Revenue rose 5.3 per cent to S$659.2 million. 

In a report dated Feb 28, DBS Group Research analyst Ling Lee Keng said: "We expect Frencken Goup to maintain a healthy margin on the back of its various initiatives in place to boost operational efficiencies."

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CGS-CIMB analyst William Tng has raised his FY2020 and FY2021 forecasts by 7-19 per cent to take into account the improved margins.

While Frencken has guided for weaker revenue in Q1 FY2020 due to its analytical, industrial automation and automotive businesses, the semiconductor and medical segment should see better performance, noted Joel Ng, KGI Securities head of Singapore research.

He added: "Covid-19 presents an uncertain 2020 outlook but the group's S$69 million net cash position and strong client base strengthen its long-term prospects in the global technology sector."

Mr Tng acknowledged the coronavirus outbreak as a risk but noted that Frencken's factories in China have resumed operations.

The analysts are also seeing value in the company's stock.

DBS's Ms Ling said that at a forward price-to-earnings of 8.2 times for FY2020 and 7.6 times for FY2021, Frencken is trading at a 30 per cent discount to its peers, which she added "is too steep".

For KGI's Mr Ng, recent price weakness brought about by market sell-offs due to the Covid-19 outbreak "presents an attractive opportunity to buy Frencken as the company continues to build on its strength and diversified business base". KGI Securities upgraded its call on Frencken to "Outperform" with a target price of S$1.01 following last week's earnings release.

CGS-CIMB has an "Add" recommendation with a price target of S$1.06, while DBS Group Research has a "Buy" call with a price target of S$1.06.

Frencken shares were up 1.5 Singapore cents or 1.8 per cent to 84.5 cents as at 11.52am on Monday.

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