UOB Kay Hian analyst Clement Ho has maintained his “buy” rating on Frencken Group, while raising his target price from $1.72 to $2.13.
Ho believes the continued uptick in factory utilisation rates is sustainable, supported by strong demand seen by key clients of Frencken, including industry heavyweight ASML Holding.
Elaborating, he says key clients of Frencken in the semiconductor and medical & analytical segments, namely ASML, Thermo Fisher Scientific and Siemens Healthineers, have continued to see an increase in orders.
See also: Frencken to see greater highs with diverse portfolio, chip shortage: analysts
ASML is benefitting from the 5G digital infrastructure build-up, while others are seeing order resumption following push-backs related to uncertainties surrounding the COVID-19 pandemic.
Ho highlights, “accounting for a combined 65% of Frencken’s 2021 revenue, the semiconductor segment (34%) and medical & analytical segments (31%) are not expected to present any negative surprises in the upcoming 1HFY2021 results in mid-August 21.”
He forecasts that revenue is expected to continue growing at a rate of 7.4% to 13.8% over FY2021-2023, translating to a three-year earnings compounded annual growth rate (CAGR) of 15.5% on the back of positive operating leverage.
Furthermore, Ho sees “bright spots” emerging in industrial automation, adding global demand for hard disk drives is expected to increase from 2021-25, according to data from the International Data Corporation.
Both industry heavyweights Seagate Technology Holdings and Western Digital Corp, have seen accelerating growth in 2021 on the back of high demand for storage.
“Hence, we believe there is increasing potential for Frencken’s industrial automation segment to surprise on the upside in 2HFY2021, as improved industry conditions should lead to higher capex budget for key customer Seagate.” Ho highlights.
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Frencken builds the modular parts of the HDD assembly line for Seagate, and also manufactures the sheet metal in-house. Typically, Frencken will receive orders 3-6 months ahead, and have a delivery lead time of a month.
Ho believes Frencken’s valuation would continue to re-rate upwards, in tandem with the cyclical upturn across the semiconductor, industrial automation and medical & analytical segments.
As at 12.06pm, Frencken shares are trading at $1.79, with a FY2021 price to book ratio of 1.8 and dividend yield of 2.1%
