Frencken's 2H20 Beat Despite Impairment; Maintain BUY

• Despite an impairment amounting S$6.2m, Frencken Group (SGX:E28)'s 2H20 PATMI of S$23.8m (+5% y-o-y) was ahead of our and street’s expectations. This was due to grants and lower than expected
  1. negative FX impact to P&L and
  2. effective tax rate.
• Management expects 1H21 to grow h-o-h, reinforcing our view of the ongoing cyclical recovery.
• Our FY21-23E forecasts for Frencken are largely unchanged, and we maintain BUY with ROE-g/COE-g target price of S$1.39 (1.6x FY21E P/B).

Expects 1H21 to be Stronger H-o-h

• Amid difficult business conditions due to COVID-19, Frencken's 2H20 revenue fell 2.3% y-o-y to S$328.1m. Semicon grew 50.6% y-o-y on the back of the global equipment spending upswing, but this was offset by declines in other sub-segments such as industrial automation (-38%) and medical (- 8%).
• Frencken's management expects 1H21 revenue to increase h-o-h, primarily driven by semicon, medical and analytical sub-segments. While automotive is expected to be flattish h-o-h, management sees scope for some potential upside.

Impairment Relates to Deferred Development Costs

• The S$6.2m impairment relates to deferred development costs mentioned in our report: Frencken Group - Maybank Kim Eng 2020-12-22: Recognises Impairment; BUY The Dip, is relating to a product, not yet launched, in the medical segment.
• Frencken's effective pending clarification from management, we currently assume FY21E effective tax rate of 20% for Frencken, comparable y-o-y.

End-markets Broadly Favourable

• We see semicon, analytical, medical and recovery in 2021. Some of Frencken’s semicon customers, such as Applied Materials, are also upbeat about semicon equipment spending strength into FY22.
• Meanwhile, the life-sciences/ medical end-markets appear increasingly optimistic risks are
  • if we have overestimated industrial automation growth (+10% y-o-y) in FY21E; and/ or
  • weaker than expected volumes, due to either still difficult business conditions/ risks of shortages in the supply chains.

Source: Maybank Kim Eng Research - 26 Feb 2021