News Analysis: Acquisition of aerospace and semiconductor-focused company to drive expansion
- Avimac’s specialisation is in the aerospace and semiconductor sectors
- Timely acquisition to enable Frencken to ramp-up capacity to meet requirements in its pipeline of new programs, especially for the semiconductor customers
- Avimac will also open doors for Frencken to build a new business pillar in the aerospace sector
- Maintain BUY and TP of S$2.65
Acquisition of aerospace and semiconductor-focused company, Avimac, for S$14m. Frencken announced the acquisition of 100% stake in Singapore-incorporated Avimac Pte Ltd for S$14m cash. This works out to 3.2x on a price to net book value basis (P/BV), which is close to the c.3x P/BV for Frencken as at FY20. The acquisition will be financed using the group’s internal resources, which is more than sufficient as Frencken has net cash of about S$72m as at 30 June 2021.
Avimac supplies high precision machining parts to a variety of industries with a specialisation in the aerospace and semiconductor sectors. With manufacturing facility located in Singapore, its clients in the aerospace segment include Singapore Aerospace Manufacturing and Collins Aerospace who are the major players in the aerospace industry. Avimac was started in 2018 by Mr Joe Lau, who is a veteran in the precision engineering industry and the founder of JEP Precision Engineering.
Timely acquisition to ramp-up capacity to serve the growing semiconductor industry. The acquisition will enable Frencken to ramp up capacity and strengthen competencies to meet the requirements in its pipeline of new programs, particularly from its customers in the semiconductor industry. The group will also be better positioned to undertake more programs and win wallet share with customers in future.
We believe the acquisition is timely, as the semiconductor industry has been in an uptrend, and tailwinds remain strong. World Semiconductors Trade Statistics (WSTS) expects the semiconductor market to register growth rate of 25.1% y-o-y in 2021 and 10.1% in 2022, following a 6.8% growth in 2020, while the US 3-month semiconductor equipment billings reached another new high in July. Frencken’s revenue contribution from the semiconductor segment has been growing at a fast pace, from 19% of total revenue to 38% as at 1H21.
Building a new pillar in the aerospace industry. This acquisition will also open a pathway for Frencken to access new technologies and potentially build a new business pillar in the aerospace industry. Currently, Frencken has five key business segments: semiconductor, medical, analytical, industrial automation and automotive.
Avimac can act as a springboard for the group to penetrate the commercial aerospace engineering industry given its established customer base and certified manufacturing facilities. Frencken is not new to the aerospace industry as it already has experience through its cooperation with NASA Jet Propulsion Laboratory.
Maintain BUY call and TP of S$2.65. Expect minimal impact on earnings in the near term but should improve going forward especially with the expected recovery in the aerospace industry.