Broker's take: Maybank KE initiates 'buy' call on Frencken, citing 'quality growth, diversity and margins'

MAYBANK Kim Eng on Sunday initiated coverage of Frencken Group with a "buy" call and a target price of S$1.20, citing "quality growth, diversity and margins".

Frencken manufactures components and modules for various industries including semiconductor, life sciences, automotive and industrial automation. Shares of the mainboard-listed company were trading at 95 Singapore cents as at the midday break on Monday, up 3.5 cents or 3.8 per cent.

In his research report, analyst Lai Gene Lih predicted Frencken's net profit would fall 11 per cent year on year for FY20, before rebounding by 10 to 17 per cent in FY21-22.

"Our FY21-22E PATMI (profit after tax and minority interests) are 14 per cent higher versus Bloomberg consensus, as we believe margin uplift potential from a breadth of new products with higher design content is underappreciated," Mr Lai wrote.

He added that the company is currently working on a range of new products across many of its subdivisions, including semiconductor, analytical, medical and industrial automation.

In particular, Frencken's mechatronics division - which accounts for 82 per cent of revenue - is expected to see growth through market-leading customers. These customers include ASML, Seagate, Thermo Fisher, and Philips.

Mechatronics products tend to be critical and have demanding requirements. Frencken is "usually the sole source" of such products for its customers, Mr Lai said.

He added that the company's geographic and product diversity and its net cash-to-equity position of 23 per cent offer it resilience amid the Covid-19 pandemic.

All of Frencken's factories are now operating as usual. Demand disruptions because of the pandemic are largely due to order or receipt delays, while cancellations are not material, Mr Lai said.

He added that Frencken customers, such as Thermo Fisher and Philips, expect the resumption of elective surgeries and lab work to reinvigorate sales.

Mr Lai also noted that the semiconductor industry is benefiting from strong cloud demand.

Frencken's business is also resilient amid US-China tensions, as the company predominantly serves domestic supply chains and/or markets, and China accounts for only 15 per cent of its sales, he added.

Mr Lai forecast Frencken's core net profit margins to improve to 7.7 per cent by 2022, up from 7.1 per cent in 2019.