BUY as Frencken's Fundamentals Remain Unchanged

• Frencken announced that it is taking a S$6.2m impairment on investments it has made to develop a product, not yet launched, in its medical segment. As the customer of this product has a strategic change in direction, Frencken (SGX:E28) does not have visibility on future revenue streams relating to this product.
• As such we cut Frencken's headline FY20E earnings forecast by 15%, but our core FY20-22E earnings forecast are unchanged, as this news does not impact our future projections.
• Maintain BUY on Frencken with ROE-g/COE-g target price of S$1.39 (1.6x FY21E P/B).

Non-cash, Exceptional Item

• The customer of this product is a US MNC in the healthcare industry. The product is not yet commercialised, and the impairment relates to capitalised development costs for this product that Frencken has invested into over several years. This is a non-cash, exceptional item.

No Impact to Our Future Projections

• This impairment does not alter the growth outlook of Frencken, as
  1. the product is not yet commercialised; and
  2. management nor we have not factored any contributions of this product into respective projections and outlook.
• As Frencken is the owner of the IPs associated with the product, there remains a possibility that the product can be commercialised in the future if another customer comes along, or if the existing customer intends to revisit the project.

Automotive and Semicon May Drive Upside

• We remain constructive towards Frencken both cyclically and structurally. Cyclically, we believe automotive and semiconductor segments are areas that could surprise us positively. Structurally, we view that Frencken’s long-term margin accretion potential is under-appreciated, as the company launches a breadth of products with greater design value add in coming years.
• Key risks are slower than expected economic recovery and difficult operating environment due to COVID-19 as these could erode the resilience of Frencken’s diversified revenue streams.

Source: Maybank Kim Eng Research - 22 Dec 2020