UOB Kay Hian analyst Clement Ho has maintained his “buy” call on Frencken Group and raised his target price from $2.52 to $2.62 after its $14 million acquisition of aerospace and semiconductor focused company Avimac.
In a Sept 15 report, Ho says that he believes this “bite-sized acquisition would help ramp up capacity expansion, particularly in the semiconductor segment, as well as to help the group gain access to new technologies and competencies.
Avimac was founded in 2018 by industry veteran Joe Lau, who was the founder of JEP Precision Engineering. The company is a subsidiary of JEP Holdings, now under UMS Holdings.
Prior to the acquisition, Avimac was a supplier to Frencken in various manufacturing programmes, and Frencken’s management cited that Avimac could act as a springboard for the group to penetrate the commercial aerospace engineering industry.
See also: Frencken Group acquires high-precision manufacturing solutions provider Avimac for $14 mil
This was due to its established customer base (counting GE Aviation and Commercial Aircraft Corporation of China as clients), certified manufacturing facilities and forthcoming programmes.
Ho notes that as at June 30, Frencken’s cash balance of $159.4 million and total borrowings of $87.5 million is more than sufficient to support the acquisition.
At this point, no additional injection is expected for Avimac and management does not foresee a significant increase in the group’s operating expenses or working capital requirements.
Separately, he expects the global demand for semiconductor components to remain strong. The current chip shortage situation in the semiconductor industry is driving demand for both front- and back-end semiconductor equipment.
As such this bodes well for the key semiconductor customers of Frencken, who are mainly in the business of manufacturing equipment to make semiconductor chips.
Ho says, “current indications and outlook of these customers are seeing a secular uptrend and we are of the view that demand for semiconductor parts and equipment is likely to be sustained into 2022.
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He is of the view that Frencken’s valuation is supported by its strong earnings growth profile, with the compounded annual growth rate (CAGR) of the company’s earnings per share (EPS) estimated at 24% from 2020-2023.
As of 4.25 pm, shares of Frencken were trading at $2.48, with a FY2021 price to book ratio of 2.6 and dividend yield of 1.8%.