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RHB Investment Research Reports

Author: rhbinvest   |   Latest post: Fri, 1 Jul 2022, 10:02 AM

 

Frencken Group- Valuations Look Attractive; U/G to BUY

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  • Upgrade to BUY, from Neutral, with an unchanged TP of SGD1.24, 16% upside and c.4% yield. Previously we had downgraded to Neutral and lowered our pegged P/E to 10x (from 14x) as considered NPAT growth would have been hampered due to higher costs, along with the devaluation of the global tech stocks. Over the past month, Frencken has corrected c.20% and is now trading at just 8.5x FY22F P/E, an attractive valuation, which we consider represents a good entry for a long term investment.
  • Muted margins likely to last for 1-2 quarters. Gross profit margins remain around 15.4% vs 17.3% a year ago, mainly due to higher prices of materials, freight and energy, and increased production overhead costs. Depreciation also surged due to significant capital investments of c.SGD28.6m during FY21. These investments were done in relation to upgrading and expanding programs for the group’s global manufacturing facilities and the acquisition of Avimac in Singapore as part of its strategy to add space, capacity, and capability to generate sustainable growth. Management will likely pass on some of these costs to its customers which could help improve margins. However, we expect these price increases to only flow in mostly during 3Q22 and expect margins in the near term to remain muted at 15.3-16.0% which would impact profitability.
  • Semiconductor and analytical segments are still going strong while automotive declines. Semiconductor segment increased 15.5% YoY to SGD76.1m, while analytical and life sciences segment is up 16.7% YoY to SGD38.9m and will likely continue to do so for the rest of FY22F. However, the automotive segment dropped 10.7% YoY to SGD19.3m mainly due to one of its key customers not being able to procure other key components to complete the products, resulting in lower volume ordered by the customer. We understand that the customer is trying to mitigate this issue and expects orders to gradually recover in the next quarters.
  • Headwinds ahead but likely priced-in. Frencken has corrected close to 60% from its peak and is now trading at 8.5x FY22F P/E which we do think it has factored in the negative facts regarding muted margins and a weaker automotive outlook. As a result of the low price level and valuation, we upgrade to BUY, from Neutral, with an unchanged TP of SGD1.24, pegged to a 10x FY22F P/E.
  • Key risks include a rise in material and overhead costs, and a downturn in semiconductor demand
  • ESG. Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% premium to our TP.

Source: RHB Research - 21 Jun 2022

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Labels: Frencken

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Chart Stock Name Last Change Volume 
Frencken 1.11 0.00 (0.00%) 1,273,500 

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