• High-tech component manufacturer Frencken is a longer-term beneficiary of positive trends in the technology sector. With a diverse blue-chip clientele, its earnings should be more stable than its peers’ amid the ongoing disruptions brought about by the COVID-19 pandemic, which has impacted manufacturing plants worldwide.
• Frencken’s EPS is expected to grow at a 24% CAGR over 2020-23. Maintain BUY.

UOB Kay Hian Hosted Frencken Group at Its Annual Asian Gems Conference

• Revenue stream from multiple industries. Frencken (SGX:E28) serves leading corporations across multiple industries, a wide range of end-user markets and different geographical regions.
• Structural growth drivers in the semiconductor sector intact. Frencken is in a good position to ride the positive market trends in 5G, Internet of Things and artificial intelligence. Core competencies such as being able to develop motor functions within a vacuum environment and helping clients improve their engineering processes give Frencken the edge to serve as a supplier of key components and provider of modular parts for a wide range of industries.
• Growth likely to continue even into 2022. Through discussion with clients, management believes that growth of the semiconductor industry will likely continue even into 2022 before any tapering in 2023-24. Management does not foresee growth to have peaked.
• Strong balance sheet to support further EPS growth and dividend payouts. A net cash pile of S$57.9m constitutes 6.5% of Frencken's market cap. This includes the S$14m acquisition of Avimac Pte Ltd, an aerospace and semiconductor-focused company. Frencken has also rewarded shareholders with a consistent dividend payout ratio of > 30% of net income ever since its listing in May 05, despite not having a formal policy in place.

Stock Impact

• Power shortage in China has no region. This compares to the 15.2-16.9% range in 2016-19, with the increase due to the higher share of the more profitable semiconductor segment from 16% in 2016 to an estimated 40% in 2022 (2020: 30%). Additionally, ongoing group-wide cost-cutting measures and efficiency improvements such as upgrading of equipment and facilities are expected to improve operating margins, further bolstering bottom line.

Valuation / Recommendation

• No changes to valuation is supported by its strong earnings growth profile, with EPS CAGR estimated at 24% over 2020-23.

• Catalysts for Frencken's Share Price
  • Higher-than-expected factory utilisation rates.
  • Better-than-expected cost management.

Source: UOB Kay Hian Research - 14 Oct 2021