Compiled by Navin Sregantan
FRENCKEN GROUP | NEUTRAL (DOWNGRADED)
AUG 22 CLOSE: $0.70
TARGET PRICE: $0.81
KGI Securities, Aug 22
Q2 FY2019 profit after tax and minority interest rose 59 per cent year-on-year (yoy) to $11.1 million, once again driven by its industrial automation (IA) segment. Its IA revenues surged 129 per cent yoy and 10 per cent quarter-on-quarter (qoq) to $45 million, offsetting weakness in its semiconductor business, which declined 23 per cent yoy and 8 per cent qoq to $24 million.
After Frencken's 70 per cent share price rally in the year-to-date period, valuations are no longer a bargain although they still trade at a 10 per cent discount to its peers. We downgrade our call to "Neutral" and peg a fair value of $0.81.
A key upside catalyst, in our view, is that Frencken is an attractive takeover target for a larger company given its diverse client and product base.
Risks are that Frencken's main business segments are cyclical in nature. A spending slowdown in its key business segments, namely semiconductor, automotive and analytical machines may impact margins and new orders. However, its track record has shown revenue resilience which may be due to the well-diversified mix of its business.
JAPAN FOODS | NEUTRAL (MAINTAINED)
AUG 22 CLOSE: $0.43
TARGET PRICE: $0.40
RHB Research Institute, Aug 22
Japan Foods' key brands, namely Ajisen Ramen, Menya Musashi and Osaka Ohsho, which account for about 70 per cent of its revenue, have witnessed a year-on-year decline in revenue.
The latest results seem to suggest that this weakness from key brands was more than offset by higher revenue contribution from new brands, namely Konjiki Hototogisu and Shitamachi Tendon Akimitsu, which registered around 60 per cent growth in revenue during Q1 FY2020.
That said, Japan Foods is experiencing rising cost pressures from a rapid increase in store count, and the introduction of new brands in Singapore.
While moderating consumer discretionary spending and availability of labour remain near-term challenges, contributions from new brands and the company's growing regional presence should help it deliver 4 per cent growth in FY2020.
A net cash position, strong free cash flow generation, and 4 per cent yield should provide share price support.
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