Understanding an Integrated Technology Solution Company Using 4 Financial Metrics

Article Highlights

• 12% rise in revenue for its trailing 12-month period
• 30% year-on-year decline in free cash flow for FY2020
• Net cash position across the years
• FY2020’s dividend held steady at 3.0 Singapore cents per share

Frencken Group Limited (“Frencken”) is a capital equipment, automotive and consumer product solution provider. It offers integrated outsourcing solutions to a diversified customer base comprising global companies.

The Company operates through two segments: Mechatronics and Integrated Manufacturing Services (“IMS”).

1. The Mechatronics segment is engaged in the design and manufacture of complex electro-mechanical assemblies and automation systems for original equipment manufacturers.
2. The IMS segment is engaged in providing integrated solution to manufacture plastic components (including design and fabrication of mold) and printed circuit board assemblies (“PCBAs”) for assembly into modules and finished products.

Evaluating Frencken Group Limited using 4 Financial Metrics

Revenue & Net Profit

For FY2020, Frencken’s revenue (Blue Bar) declined by nearly 6% year-on-year to S$620.61 million. The drop in its topline was mainly due to lower sales contributions from both Mechatronics and IMS Divisions.

Apart from the semiconductor segment, the Group’s other business segments recorded lower sales due to business disruptions and slower economic conditions caused by the COVID-19 pandemic.

Despite that, Frencken’s profit after tax (Purple Bar) grew by 1% year-on-year to S$43.04 million. The higher profit level was contributed by the lower Selling and distribution expenses and the higher other income, mainly from the job support scheme grants.

For its trailing 12-month period, Frencken’s revenue grew by 13.3% to S$703.40 million. The higher revenue was driven by higher sales contributions from the Mechatronics and IMS Divisions.

In line with the higher revenue, Frencken’s profit after tax jumped by more than 30% to S$56.04 million.

Free Cash Flow

For FY2019, Frencken’s free cash flow skyrocketed by more than 3400% year-on-year to S$81.26 million. The significant jump was mainly attributable to the higher net cash generated from operating activities and the lower capital expenditure.

In FY2020, lower cash generated from operating activities and higher capital expenditure, the free cash flow decline 30% year-on-year to S$57.54 million.

Leverage Ratio

Apart from FY2018, Frencken has been in a net cash position for the past few financial years, as seen from the net debt to equity ratio. This shows that the company is in a strong financial position and has more than enough cash resources on hand to meet its debt obligations.

Meanwhile, Frencken’s total debt to equity ratio remained fairly unchanged in the past years since FY2018 – showing that it has been growing without the use of leverage.

With the improvement in its bottom line, Frencken’s interest coverage ratio increased to 24.44 times in FY2020 and 33.9 times in the past trailing 12 months. The high ratio indicates that the company has sufficient earnings on hand to meet its interest obligations.

Dividend

After experiencing a 40% year-on-year jump in its total dividend per share in FY2019, Frencken has kept its total dividend per share unchanged at 3.0 Singapore cents for FY2020. This translates into a dividend payout ratio of 30%, which is similar to FY2019.

With the payout ratio hovering at around 30%, this shows that Frencken is keeping more of its resources on hand for any potential business expansion in the future.

Based on its current share price of S$2.17, this translates into a dividend yield of 1.38%.

Conclusion and Prospects

To conclude, Frencken’s financial performance has remained stable across the past few financial years. In addition, the positive free cash flow and net cash balance sheet shows that the company is in a healthy position to expand prudently and capture opportunities in the electronics sector.

In terms of management outlook, Frencken expects its overall revenue in 2H FY2021 to remain stable as compared to 1H FY2021.

The anticipated revenue performance for each key individual business segment in 2H FY2021 compared to 1H FY2021 is as follows:

• The Semiconductor segment is expected to post stable revenue.
• Medical and Analytical segments are expected to grow.
• Industrial Automation and Automotive segments are anticipated to soften.

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