Favourable Prospects, Cyclically and Structurally; BUY

• Frencken (SGX:E28)’s cyclical and structural prospects remain attractive. As it executes on delivering a breadth of new products with greater value-add in coming years, we see upside potential to net margins.
• Alongside, institutional interest have been rising as the investment thesis plays out.
• We raise our target price of Frencken to S$1.74, now based on 14.5x FY21E P/E (+2 standard deviation above 10-year mean), from ROE-g/COE-g-derived 1.6x FY21E P/B previously, to account for longer-term potential of better than expected margins.

Drivers of Cyclical Dynamics

• Frencken expects new product introductions in medical and analytical segments in FY21E, of which in some Frencken have increased value-add materially. As elective surgeries return, Frencken expects orders deferred from last year to be realised this year. Semiconductor visibility also appears strong through the entire year. Of the S$23.7m spent on capex in FY20, around 80% was purposed for semiconductor requirements.

Margin Upside in Medium Term

• Our/consensus’ net margin assumption are 7-8% believe as Frencken’s proprietary eco-PVD and filters in the automotive sub-segment grow in future years, these could be a further driver of IMS margins.

Momentum in Execution Underpins Rising Interest

• We believe valuation at +2 standard deviation above 10-year mean is not indicative of future potential, as since 2015, current management have turned around the company, and have set the foundation to drive growth from a breadth of new products with greater value add.
• Yet, our valuation of 14.5x FY21E P/E for Frencken is still a discount to what consensus is inferring for Venture Corp (SGX:V03) (18x), which we see is warranted as Venture Corp is larger and more diversified.
• Key risks are:
  1. our overestimation of industrial automation growth in FY21E, and/ or
  2. weaker-than-expected chains.

Source: Maybank Kim Eng Research - 14 Mar 2021