A small acquisition
? Frencken has announced a small acquisition (51.92% stake in Penchem Technologies) for S$5.4m.
? We think the acquisition will have no immediate material impact but could provide an opportunity to grow a new revenue stream in 5-10 years.
? Reflecting the valuation de-rating in equities, our TP for Frencken falls to S$2.07. We upgrade to Add as current rate hike fears appear to be priced in.
A small acquisition…
Frencken has announced that it is acquiring a 51.92% stake in Penchem Technologies Sdn Bhd (unlisted). As the proposed acquisition did not trigger any disclosure rules (on potential financial impact), we believe Penchem’s revenue and net profit base is likely small. Frencken will pay cash for the acquisition which translates into a historical FY21 P/BV of 1.92x.
…for long-term opportunities
Penchem focuses on designing, developing, formulating and manufacturing polymer materials for use in the electrical and electronics industry and also coatings, adhesives, and fillers for industries such as automotive, marine and aerospace. Penchem has also invested in the development of environmental and ethically responsible bio-based polymers to serve the rapidly expanding market for eco-friendly materials that support the sustainability framework. Penchem has a manufacturing facility in Penang and its customers include multi-national companies in the semiconductors, fibre optics, solidstate lighting, consumer electronics and automotive markets.
Model – no changes for now…
We make no changes to our FY21-23F forecasts pending the announcement of Frencken’s FY21F results (FY20 results were released on 25 Feb 2021). 4Q21F net profit likely grew 35.2% yoy (-4.1% qoq) to S$14.2m. Note that 4Q20 net profit was depressed by a S$6.2m impairment loss.
…but markets have de-rated
Although there are no changes to our current FY21-23F forecasts, peer valuations have declined given the concerns over interest rate hikes. The CY23F sector average P/E has come down to 10.4x currently from 12.3x in Nov 2021. Keeping our 10% premium to the sector average P/E (given Frencken’s 17.3% 3-year EPS CAGR), our new P/E multiple is 11.44x, translating into a lower TP of S$2.07. As the market has adjusted for current rate hike concerns, we upgrade our call on Frencken to Add (previously Hold). Downside risks are potential production disruptions arising from Covid-19 infections in its workforce and
further cost pressures from higher raw material costs.