Frencken Group Faces Slower Recovery but Retains Top Pick Status

Frencken Group Ltd remains a standout in Singapore’s tech sector despite a slower-than-expected recovery. The company reported 3Q24 revenue of SGD198.6 million and PATMI of SGD9.2 million, reflecting year-on-year growth of 7.7% and 29.3%, respectively, but falling short of market expectations. The weaker performance was attributed to contractions in the medical and automotive segments and subdued growth in life sciences and semiconductors.

Analysts have revised Frencken’s FY24/25 PATMI down by 12% and 7% respectively, citing delays in the much-anticipated semiconductor order ramp-up, now expected in 2Q-3Q25. Global trade tensions between the US and China further complicate the outlook, potentially dampening demand in key markets.

However, Frencken’s long-term prospects remain promising. Its life sciences and medical segments, while decelerating post-pandemic, continue to offer growth opportunities. The company also benefits from its resilience in the semiconductor industry, positioning it as a key player in the sector’s eventual recovery.

With a target price of SGD1.50, pegged at 14x FY25E P/E, Frencken retains its status as a top pick in the Singapore tech universe, underscoring its ability to outperform local peers amid sector-wide challenges.

Frencken Group: Value Proposition

Technology hardware manufacturer that specialises in complex components.  High-mix, low-volume, high complexity for mechatronics segment.  Customers are sticky, given: i) decades-long working relationships; ii) complementary competencies; and iii) mutual dependency (sole-source for some critical products). We expect Frencken to leverage its relationships with customers to introduce products with greater value-add, in turn driving margins further.

Financial Metrics

Over the medium term, we expect earnings to be driven by revenue growth and margin optimisation through new products and improving efficiencies.  Net cash balance sheet and strong cash flow should provide resilience amid economic uncertainty.  Historically pays out 30% of earnings as dividends. We expect this trend to continue.

Business Model & Industry Issues

The nature of Frencken’s business in the electronics and automotive manufacturing supply chains exposes it to risks including environmental, workplace safety, and conflict of interest. Frencken has not faced any fines or non-monetary sanctions pertaining environmental nor socioeconomic laws and regulations in 2021.  From an environment perspective, Frencken’s Eco-PVD offering can be seen as a more environmentally friendly approach for automotive coating. While Frencken does not use recycled materials currently, it may do so in the future subject to customers’ requirements.  From a governance and socioeconomic perspective, Frencken is adopting industry best practices, including those set by customers, as these facilitate smooth business. – Source: Maybank

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