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Frencken proxy to growth in 5G and AI: analysts

Jovi Ho
Jovi Ho • 3 min read
Frencken proxy to growth in 5G and AI: analysts
Analysts are recommending ‘buy’ on global technology company Frencken Group for its proxy to growth trends in 5G, AI and more.
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Analysts are recommending ‘buy’ on global technology company Frencken Group for its proxy to growth trends in 5G, AI, health and wellness and population aging through its blue-chip customers, says Maybank Kim Eng analyst Lai Gene Lih. This comes on the back of 3QFY2020 earnings of $13.3 million.

In a Nov 21 note, Lai maintained ‘buy’ on Frencken with a sustained target price of $1.39.

“In the short term, semiconductor equipment/analytical/automotive endmarkets, which form around 70% of sales, should provide cyclical resilience. Longer-term, we are excited by margin growth potential from deepening value-add with customers as Frencken launches a breadth of products in coming years,” says Lai.

Frencken manufactures components and modules for various industries including semiconductor, life sciences, automotive and industrial automation. The group provides Original Equipment Manufacturing (OEM) and Original Design Manufacturing (ODM) services.

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Lai notes that in the company’s mechatronics segment (approximately 80% of revenues), Frencken’s market leading customers include ASML, Seagate, Thermo Fisher and Philips. “Mechatronics products tend to be critical, have demanding requirements, and Frencken is usually the sole source.”

“Frencken is currently involved in a breadth of new products across semiconductor, analytical, medical and others slated for launch in coming years. As it provides greater design value-add, we believe margin expansion potential is currently underappreciated,” Lai adds.

Lai forecasts earnings growth of 21% in FY2021E, underpinned by semiconductor equipment, analytical, and automotive end-markets, estimated to account for around 70% of revenues. “These segments are currently in various degrees of upswing/recovery. Balance sheet is clean with net cash to equity of around 8%.”

To UOB Kay Hian analyst Clement Ho, Frencken’s 3QFY2020 earnings took 9MFY2020 net profit to 83% of their full-year estimate.

See: Why analysts are more optimistic on Frencken

In a Nov 17 note, Ho maintained ‘buy’ on the company with a raised target price of $1.42 from $1.37.

“The business update reflected earlier and stronger-than-expected operating leverage, buoyed mainly by a better sales mix and greater cost control efforts. We expect the semiconductor segment to continue driving growth going forward, driven by the accelerating development of 5G technology,” says Ho.

Frencken’s earnings was despite a 2.8% y-o-y slip in revenue to $165.5 million, as a result of lower sales from the industrial automation (-32%), analytical (-4.8%) and automotive (-4.4%) segments, says Ho.

The relatively more profitable semiconductor (+49.5%) segment was the clear driver for Frencken, as well as tighter cost control measures, which resulted in a 1.7ppt y-o-y expansion in gross profit margin to a record 17.6%.

See also: Why Frencken remains a 'buy' when industrial automation segment stays muted: RHB

That said, demand for semiconductor components remains strong. According to Ho, the semiconductor segment is estimated to contribute 32% and 35% of overall sales for Frencken in 2020F and 2021F, respectively, compared to 18% in 2019.

“This will mainly be driven by the huge demand stemming from the accelerating development of 5G technology, reflected in the record capex spending by major foundries, the Taiwan Semiconductor Manufacturing Company and Samsung Electronics, in 2020-21. Pricing environment for the components manufactured by Frencken is understood to be healthy, and indicative demand from clients outstrips production capacity,” he adds.

Ho has raised FY2020-2021F earnings per share (EPS) forecasts by 7.7% and 3.6% respectively.

As at 12.20pm, shares in Frencken are trading at 2 cents lower, or 1.80% down, at $1.09.

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