“Buy” on quality growth and resilience
Despite the Covid–19 pandemic and US– China rivalry rattling markets in recent months, Maybank Kim Eng (MKE) analyst Gene Lih Lai has initiated a “buy” call on the technology hardware manufacturer Frencken. Quality growth and its relative insulation against geo–economic conflicts, he says, are likely to make it a good prospect for investors.
“Our “buy” on Frencken is premised upon exposure to structurally growing markets through blue-chip customers, earnings resilience despite a challenging business environment due to Covid–19 and US–China trade tensions and track record of margin improvement with room for more,” Lai says in his July 12 report. He has given the counter a $1.20 12–month price target with a 34% upside.
Frencken manufactures components and modules for a wide range of growth industries including 5G and artificial intelligence. In mechatronics, which consists of 82% of its revenue, it is often the sole supplier of certain parts to customers that are themselves market leaders such as ASML, Seagate, Thermo Fisher and Phillips.
Particularly in the mechatronics segment, Frencken’s products tend to be critical but are not core competencies of its customers, says Lai. Using Frencken’s services allows the customers to free up resources to maintain their market leadership.
Frencken is chosen as a supplier not just because of its engineering and manufacturing expertise, but also because of its experience in managing the supply chain for complex products. “Overall, we believe this boosts Frencken’s stickiness with customers,” he notes. Lai expects Frencken to tap into these relationships to introduce products with greater value–add, consequently further driving its margins. The firm has also been upgrading its equipment and that has resulted in better operating margins.
Moreover, he does not believe that Frencken will be unduly affected by Covid-19 despite present uncertainty. Much of demand–side disruptions has tended