• Frencken Group's 1H20 results in line; semiconductor shines.
• All key segments expected to post higher or at least stable revenue in 2H20 vs 1H20.
• Worst is over for the supply chain; adjust FY21F earnings up by 11%.

Frencken Group's 1H20 Results Highlight

Lower revenue due to COVID.

• Frencken Group (SGX:E28)'s 1H20 group revenue decreased 9.6% y-o-y to S$292.5m, as some of the business segments were affected by business disruptions and slower economic conditions amid the COVID-19 pandemic.

Margins dragged by automotive.

• Gross profit fell 14.5% y-o-y to S$45.4m. Gross profit margin decreased to 15.5% from 16.4% previously, mainly dragged down by the softer GP margin of the automotive segment.

Net profit in line.

• Frencken Group's net profit of S$18.7m (-4.9% y-o-y), is in line with our estimates, accounting for 50% of our FY20F forecasts.

Semiconductor shines.

• The semiconductor segment’s sales grew 73.6% y-o-y to S$87.9m in 1H20. The Group recorded higher orders for both front-end and back-end semiconductor equipment from customers in Europe and Asia, reflecting the strong recovery of the global semiconductor industry. We continue to see strength in the semiconductor space, supported by the positive industry data.
• SEMI is expecting global fab equipment spending to increase by 24% y-o-y in 2021. Momentum for semiconductor equipment billings remained strong, up 14% y-o-y in June 2020, its ninth consecutive month of y-o-y increase and we view this as an optimistic sign for the industry.

Medical improved.

• Sales of the Medical segment improved 4.2% y-o-y to S$44.0m in 1H20, attributable to improved demand from a key customer in Europe.

Analytical weaker.

• The decline in Analytical segment’s sales was due primarily to lower demand from customers in Europe.

Industrial Automation eased from a strong 1H19.

• Sales of the Industrial Automation segment fell 34.1% y-o-y to S$58.1m in 1H20 due to lower shipments of storage drive production equipment to a key multinational customer. Sales of this segment are typically lumpy and in FY19, Frencken Group booked in a substantial amount from this segment. We expect the storage drive to perform well, as working from home and online learning continues to be the new normal for many.

Automotive dragged IMS down.

• The weaker IMS division was mainly dragged down by the Automotive segment as orders from customers in Frencken Group’s main automotive markets were affected by measures implemented by the respective governments to contain the spread of COVID-19 and an overall slowdown in end-user demand. We expect the Automotive segment to stage a gradual recovery in 2H20, on improving demand, especially from China.

Frencken Group - Outlook for 3Q20

• Semiconductor, Analytical and Automotive divisions are expected to record higher revenues in 2H20 vs 1H20.
• We believe the worst is over for the supply chain. The initial supply chain disruptions caused by the COVID-19 lockdown measures are largely resolved.
• At present, all the Group’s manufacturing sites in Asia, Europe and the US have resumed normal operations. Demand is also gradually improving as Frencken Group expects higher or at least stable revenue in 2H20 as compared to 1H20.
• On the back of the improving outlook, we have tweaked our FY21F numbers up by 11%. Our higher Target Price of S$1.43 is pegged to 13.2x (previously 10.4x), in line with the re-rating of the technology sector, and is still at a 20% discount to global peers’ average of 16.5x, given Frencken Group’s smaller scale. We have also rolled forward earnings to FY21F.
• Maintain BUY.

Source: DBS Research - 14 Aug 2020