• Stay BUY, SGD0.82 DCF-based Target Price, 30% upside with 4.4% FY19F yield.
• FRENCKEN GROUP LIMITED (SGX:E28) has been unaffected by the US-China trade war, since most of its factories and business activities are in Europe. Management’s outlook remains positive, and 2Q should see robust y-o-y growth for its industrial automation division, as well as continued expansion in the analytical and medical segments.
• We expect FY19F PATMI to surge 12.7% y-o-y.
• At 6.9x FY19F P/E (peer average: 9.9x), this stock is an undervalued gem.

Industrial Automation Still the Key Driver

• Sales at the industrial automation segment, which are typically lumpy, spiked up by 548.4% y-o-y in 4Q18 and 194.4% in 1Q19, boosted by increased orders for storage drive production equipment from a key customer that is setting up a new factory. Management expects to post robust y-o-y growth in 2Q19 due to the same reason. We expect these factors to continue driving sales in 2Q-3Q, which should be very positive for the company.
• Management is also bullish on the outlook of its analytical and medical units, which should record continued y-o-y growth in 2Q19. We expect the two businesses to expand y-o-y this year as well, driven by new customers and new projects.

Higher Dividends Expected

• With a 30% dividend payout ratio and our projection of continued y-o-y growth in earnings, we believe Frencken’s dividends will increase even though its payout ratio remains unchanged. See Frencken's dividend history.
• We expect FY19 dividend yield to increase to around 4.4%.

One of the Rare Manufacturing Companies Delivering Growth in 2019

• We believe Frencken’s technology, which has been making rapid upwards, as earnings growth continues to quarters.
• Frencken is also one of the rare manufacturing companies that will probably include an economic slowdown, and customers delaying orders.

Source: RHB Invest Research - 12 Jun 2019