RHB analyst Jarick Seet has maintained his “buy” call on Frencken Group with a higher target price of $1.37 from $1.22 previously.
This comes after the group announced, on Dec 21, that it would take an impairment loss of $6.2 million that’s associated with the development of a product in the healthcare industry due to a strategic direction change by its customer to not launch the product.
Frencken says the group expects to remain profitable in 2HFY2020 and FY2020 and that the impairment loss, which is a non-cash exceptional item, is not expected to have an impact on its cash balances.
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Despite the impairment of the development costs, Frencken still remains the owner of the design patents associated with the product, and could still benefit from it, should the customer change its mind in future.
For Seet, Frencken’s revenue from the automotive sector is “likely to be better” in 2HFY2020 compared to 1HFY2020 as automotive sales should have picked up after the end of the global lockdown caused by Covid-19.
“We think revenue from this segment will continue to pick up in 2021 as well,” he says.
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Growth in industrial automation will also likely come in 2021, says Seet, as Frencken’s key customer in the industrial automation segment has delayed its new product launch due to supply chain issues.
“We now estimate the launch will likely happen in 2021, expect this segment to continue taking a hit, and only see a recovery next year, in 2021. Management also guided that the industrial automation segment would remain stable in 2HFY20 after seeing a 35-40% drop y-o-y in 1HFY2020,” he adds.
On that, Seet believes 2021 will be a strong year for Frencken where both its semiconductor and industrial segments should “drive profits upwards”.
“We lowered our 2020 forecasts to reflect the impairment of $6.2 million but have included higher growth expectations from the automotive and semiconductor sector for 2021F,” he says.
“As a result, we expect a 38.5% growth in earnings per share (EPS) for 2021... We believe there is also room for further re-rating, as peers are trading at higher valuations. We remain positive on Frencken’s long-term prospects and its management team and retain our ‘buy’ recommendation,” he adds.
As at 11.01am, shares in Frencken are trading 1 cent higher or 0.8% up at $1.25, or 1.6x according to RHB’s P/B estimates.
