• Maintain BUY, DCF-based SGD0.82 Target Price, 8% upside plus 4% yield FY20F.
• As the bulk of Frencken Group (SGX:E28)’s factories are in Europe – along with its business activity – the group has been unaffected by the US-China trade war until now.
• Management is guiding for a more muted outlook, with a likely slowdown in industrial automation in 4Q19 due to the segment’s lumpy business nature. However, it is still positive on the medical and semiconductor segments for 4Q19F.

Muted 4Q19F

• Sales at the industrial automation segment, which are typically lumpy, increased 23.3% y-o-y in 3Q19. This was boosted by increased orders for storage drive production equipment, from a key customer setting up a new factory. See Frencken Group Announcements.
• Management expects a revenue decline in 4Q19 (also a quarterly drop), as orders for these segments are usually lumpy.
• Frencken Group also expects its analytical and automatic segments’ growth to tone down in 4Q, but anticipates y-o-y growth in the semiconductor and medical divisions, driven by new customers and projects.

Higher Dividends Ahead

• With a 30% dividend payout ratio and our projection of continued y-o-y growth in earnings, we believe dividends will increase despite its payout ratio staying unchanged. We expect the FY19 yield to increase to 3.6%. See Frencken Group Dividend History.

One of the Rare Manufacturing Companies Delivering Growth in FY19

• We believe Frencken Group’s technology – which has been making rapid advancements in recent years – will provide more solutions to its customers and support future projects in terms of margins and profitability.
• As the stock is trading at just 8.4x FY19F P/E – well below the peer average of 9.9x – and offering a 3.6% yield for this FY, we believe this counter is undervalued.
• Despite a muted 4Q19F ahead, Frencken Group is still one of the rare manufacturing firms likely to deliver y-o-y growth this year. As a result, we stick to our call and DCF-backed Target Price. See Frencken Group Share Price; Frencken Group Target Price.
• Key downside risks to our call include an economic slowdown and customers delaying orders.

Source: RHB Invest Research - 11 Nov 2019