SINGAPORE (June 24): UOB Kay Hian has initiated coverage on Frencken Group with a “buy” call and target price of $1.15.
In a Tuesday report, analyst Clement Ho says he likes the high-tech component manufacturer for its stable earnings due to its diverse revenue stream, despite the temporary pandemic-induced slowdown, which has affected manufacturing plants around the world.
Despite expected lower sales in 2020, Ho forecasts the company’s operating margin to normalise above 11%, compared to the sub-9% region between 2014 and 2017. The higher margin is due to cost-cutting measures and efficiency improvements.
The analyst also expects a slight revenue contraction of 6.4% due to the worsening dynamics in the automobile industry, in spite of the healthy demand growth from the semiconductor business.
“A resumption of orders in the company’s analytical and industrial automation subdivisions is expected to lift 2021-22 top-lines by 8.7% and 9.5%, respectively,” he says.
Ho also sees further opportunities for the group to grow on positive technology sector trends.
“As a component supplier and provider of modular parts for companies in industries such as analytical & life sciences, healthcare and industrial automation, the group will benefit from higher demand for parts as the technology trends evolve towards mass consumption,” he says.
Frencken’s supportive balance sheet with a net cash value of $92.9 million will help the company weather volatile conditions.
“Past the volatile period, we believe Frencken will emerge with a leaner cost structure, which translates into greater operating leverage as revenue normalises. Shareholders should be rewarded with a consistent dividend payout of >30% of net income, which Frencken has made since its listing in May 2005,” he shares.
“Assuming a 30% payout ratio, 2020-21F DPS of S$0.0275 and S$0.029 would translate to yields of 3.2% and 3.4% respectively. Frencken currently trades at 9.4x 2020F PE and 4x EV/EBITDA,” he adds.
As at 3.39pm, shares in Frencken are changing hands 1.5 cents lower, or 1.7% down, at 88.5 cents.
