June 12, 2019

Frencken has been unaffected by the US-China trade war, since most of its factories and business activities are in Europe. Management’s outlook remains positive, and 2Q should see robust YOY growth for its industrial automation division, as well as continued expansion in the analytical and medical segments. We expect FY19F PATMI to surge 12.7% YoY. At 6.9x FY19F P/E (peer average: 9.9x), this stock is an undervalued gem.

Sales at the industrial automation segment, which are typically lumpy, spiked up by 548.4% YoY in 4Q18 and 194.4% in 1Q19, boosted by increased orders for storage drive production equipment from a key customer that is setting up a new factory. Management expects to post robust YoY growth in 2Q19 due to the same reason. We expect these factors to continue driving sales in 2Q-3Q, which should be very positive for the company.

Management is also bullish on the outlook of its analytical and medical units, which should record continued YoY growth in 2Q19. We expect the two businesses to expand YoY this year as well, driven by new customers and new projects.

With a 30% dividend payout ratio and our projection of continued YoY growth in earnings, we believe Frencken’s dividends will increase even though its payout ratio remains unchanged. We expect FY19 dividend yield to increase to around 4.4%.

One of the rare manufacturing companies delivering growth in 2019. We believe Frencken’s technology, which has been making rapid advancements in recent years, will provide more solutions to customers and support future projects in terms of margins and profitability. The stock is trading at just 6.9x FY19 P/E, well below its peer average of 9.9x for FY19Fm with a 4.4% dividend yield for FY19F. As such, we believe Frencken is undervalued and will likely continue to rerate upwards, as earnings growth continues to pick up in subsequent quarters. It is also one of the rare manufacturing companies that will probably be delivering growth YoY in FY19. As a result, we maintain BUY with an unchanged DCF-backed TP of SGD0.82 – RHB

Frencken Group closed at: S$0.63