SINGAPORE (Aug 16): KGI Securities is reiterating its “buy” recommendation on Frencken Group, formerly known as ElectroTech Investments, while raising its target price estimate to 72 cents from 63 cents previously.
Frencken, a provider of capital and consumer equipment services, recently saw its 2Q net profit grow 62% y-o-y to $6.6 million.
This was mainly driven by a jump in sales from its semiconductor business segment and improving gross margins on better capacity utilisation, as well as a shift of its business to its higher-margin mechatronics division, recalls analyst Joel Ng in a report issued on Tuesday.
Ng sees the stock as one that is undervalued versus its peers – which average at 12 times forward P/E and 1.6 times P/B versus Frecken’s valuation based on 10 times FY18 earnings which implies 1.2 times P/B.
“Frencken is a laggard and may perhaps be under the radar of many investors given its lower profile relative to peers. Venture, Hi-P and Valuetronics are trading at 13-18x forward P/E and may be trading at a premium to industry average in view of their larger size. Still, smaller peers like AEM, Fu Yu, Memtech, Avi-Tech and Jadason are trading at 9x-14x forward P/E, a premium to Frencken,” elaborates the analyst.
He cautions that the group’s main business segments – namely semiconductor, automotive and analytical machines – are cyclical in nature, which implies that a spending slowdown may impact margins and new orders.
“However, [Frencken’s] track record has shown revenue resilience which may be due to the well-diversified mix of its business,” says Ng.
“Management has put in place several initiatives to improve efficiency and capacity in FY17. Its Mechatronics division (semiconductor, medical, analytical, industrial) continues to show improvement while its IMS division (mainly Automotive) is currently developing a new manufacturing facility in Chuzhou in China,” he adds.
As at 11.58am, shares in Frencken are trading flat at 51 cents.
