The “worst is over” for supply chain Frencken Group Limited, says DBS Group Research, a day after the company posted a 4.9% dip y-o-y in earnings to $18.7 million for 1H2020. DBS Group Research analyst Ling Lee Keng is maintaining “buy” on the company with a raised target price of $1.43.
“The initial supply chain disruptions caused by the Covid-19 lockdown measures are largely resolved. At present, all the Group’s manufacturing sites in Asia, Europe and the US have resumed normal operations,” notes Ling in an August 14 note.
“Demand is also gradually improving as Frencken expects higher or at least stable revenue in 2H2020 as compared to 1H20. Frencken’s strong presence across a wide variety of industries and business segments should help to provide resilience and stability to the Group,” she adds.
See also: Frencken Group's 1H20 earnings dip 4.9% to $18.7 mil
Frencken Group Limited (Frencken) provides end-to-end solutions across the entire customer value chain. It offers comprehensive original design, original equipment and diversified integrated manufacturing solutions for world-class multinational companies in the automotive, healthcare, industrial, life sciences and semiconductor industries.
Revenue dropped 9.6% y-o-y to $292.5 million for 1H2020 on the back of lower revenue contributions from the Mechatronics and IMS Divisions due to the Covid-19 pandemic.
That said, Ling points to Frencken’s good exposure of 30% revenue to the growing semiconductor segment, up from 16% in 1H2019. That same exposure, however, may leave Frencken vulnerable. “Frencken has exposure to customers in the US, European Union (EU) and Asia. A broad global economic slowdown could impact demand and earnings,” warns Ling.
CGS-CIMB analyst William Tng is less optimistic, charting a “challenging 2H2020” ahead for Frencken.
“1H20 revenue was below our/consensus’ full-year expectations at 42%/45% of full-year forecasts. While 1H2020 net profit at 44%/46% of our/consensus full-year estimates may be deemed in-line, we note that Frencken benefitted from an exchange gain of S$1.1m and government grants relating to Covid-19 of $2.8 million in its 1H2020 results,” notes Tng in an August 13 note.
Tng is downgrading his recommendation to “reduce” from “add”, with an unchanged target price of $1.06.
Traditionally, the second-half tends to be stronger for Frencken, notes Tng. However, given the company’s guidance that the operating landscape remains challenging in 2H20 due to the effects of the Covid-19 pandemic, Tng notes that 2H2020 strength may be weaker this year.
“For 2H2020, Frencken guides that the semiconductor segment is expected to post higher revenue compared to 1H2020, while the analytical segment is expected to record a modest increase in revenue compared to 1H2020. The medical and industrial automation segments are anticipated to remain stable in 2H2020 compared to 1H2020. For the automotive segment, Frencken expects revenue in 2H2020 to be higher than 1H2020.”
Frencken’s semiconductor segment grew 73.6% y-o-y in 1H2020 but other segments, namely the analytical, industrial automation and automotive segments, saw double-digit y-o-y revenue declines.
The company's semiconductor division is a "clear outperformer", according to KGI Securitiies in an August 17 note. KGI Securitiies analyst Joel Ng is optimistic about the company's "solid financial ground" of $5.6 million in free cash flow and expects overall improvement in 2H2020.
Ng is maintaining "outperform" on the company, with a raised target price of $1.21.
As at 3.30pm, shares in Frencken Group at trading at 19 US cents lower, or -15.3% down, at US$1.05 (S$1.44)
