Frencken continues to outperform amid challenging quarter for manufacturing sector

SINGAPORE (Aug 13): Technology solutions provider Frencken Group has emerged one of the rare manufacturing companies that delivered growth in 2Q19, even as many of its peers in the manufacturing sector companies saw their profits tumble amid geopolitical tensions and a slowing economy.

Earnings for the 2Q19 ended June came in at $11.1 million, a significant 58.7% hike from $7.0 million in the same quarter last year.

2Q19 revenue increased by 11.5% to $164.3 million, from $147.4 million a year ago, spearheaded by a 16.7% growth in revenue from the Mechatronics Division.

Segmentally, sales from the industrial automation segment, which was noted to be typically lumpy in nature, more than doubled to $46.1 million due to increased orders for storage drive production equipment from a key multinational customer.

Sales of the medical segment also grew 7.4% y-o-y to $22.8 million due to higher demand from a key customer in Europe.

However, sales from the semiconductor segment fell 22.7% to $24.3 million, on the back of a cyclical downturn in the global semiconductor industry.

The group’s Integrated Manufacturing Services (IMS) Division slipped 5.0% to $31.7 million during the quarter, mainly due to reduced sales of the consumer & industrial electronics and tooling segments.

As a result of higher revenue, the group’s gross profit rose 15.9% to $28.0 million, with gross profit margin improving 0.6 percentage points to 17.0% in 2Q19 due primarily to higher margin contribution from the IMS division.

Going into the next quarter, market watchers are projecting muted growth for the group, with only two out of its five business segments expected to see moderate revenue improvements y-o-y.

Despite the headwinds, analysts remain bullish on Frencken’s ability to outshine its competitors, especially on the back of its rapid technological advancements over the years.

To date, Frencken remains largely unaffected by the US-China trade war, as the bulk of its factories and business activities are in Europe.

However, the management is guiding for a more muted outlook going forward. A slowdown for the industrial automation segment is expected in 3Q19 due to its lumpy business nature, while other segments are expected to face slower demand from its European customers.

DBS Group Research is maintaining its “buy” call on Frencken Group, and raising its target price by 5 cents to 80 cents.

Citing the strong 1H19 performance despite global headwinds, DBS analyst Ling Lee Keng says medical and industrial automation is likely to drive 3Q19 growth.

“At 7.6x FY19F and 7x FY20F earnings, Frencken Group is trading at about 30% discount to its peers’ average of close to 11x price-to-earnings (PE). In our view, this discount is too steep,” says Ling. “The stock is supported by a dividend yield of about 4%, based on a 30% payout ratio.”

“The accelerating technological advancements and market trends in cloud computing, big data, artificial intelligence (AI), augmented reality (AR), virtual reality (VR), proliferation of connected devices and Internet of Things (IOT), as well as the transformation of the automotive industry and advances in the analysis of biotech and genomics are drivers for Frencken’s business,” she adds.

Moreover, Frencken’s strong presence in a wide variety of industries and business segments – namely Automotive, Analytical & Life Science, Medical, Semiconductor and Industrial & Industrial Automation provides greater resilience and stability.

Similarly, CGS-CIMB Research and RHB Group Research are maintaining their “add” and “buy” calls on Frencken Group, with higher target prices of 95 cents and 82 cents, respectively.

“We believe Frencken’s technology – which has been making rapid advancements in recent years – will provide more solutions to its customers and support future projects in terms of margins and profitability,” says RHB lead analyst Jarick Seet.

The analysts also remain optimistic on growth delivered by new customers and projects, as well as stronger-than-expected sales in its industrial automation segment.

As at 1pm, shares at Frencken Group are trading one cent lower at 65 cents.