Singapore Stock Picks: Frencken Group (TP SGD0.49)

Frencken Group (SGD0.30) BUY (TP: SGD0.49)

 Grossly Undervalued In a Booming Sector The recovery in Europe’s auto sector is apparent in the climb in car sales six months in a row. The sector is revving up as the market responds positively to Amtek Engineering’s bid for an auto components maker at a 21.9x FY13 P/E. However, we prefer Frencken given its lower gearing and stronger business. We lift our TP to SGD0.49, based on a 9.6x FY14 P/E and 20% discount to the peer average, as its valuation tries to catch up. 

 Frencken to benefit from Europe’s auto recovery. The 7.6% y-o-y growth in February registration of new passenger cars to 894,730 marks the sixth consecutive month of rising car sales in Europe, signaling that the region’s car sales are on a firm path to recovery.

We expect Frencken to benefit strongly from this recovery trend as the bulk of its automotive components is exported to European customers. Sector boom to fuel M&A activities. Amtek (AMTK SP, NR), which is also a precision component supplier, plans to shift its focus to the booming auto sector via the proposed acquisition of Interplex, an automotive components company renowned for its miniature parts.

 Amtek could pay up to USD210m for Interplex, valuing the company at a 21.9x FY13 P/E and 2.6x FY13 P/NTA (FYE May). This demonstrates the level of interest in auto component suppliers during this auto boom. Prefer Frencken at current valuations. Following news of the proposed acquisition, Amtek’s share price has rallied 38.9% to a high of SGD0.75/share.

 At the current price of SGD0.66, the stock is trading at a consensus FY14 P/E of 10.5x and FY14 P/BV of 1.6x. While Interplex has certain cutting-edge capabilities in areas such as plating and insert moulding in the automotive industry, the uncertainty surrounding the acquisition, the post-acquisition execution as well as the high net gearing (134.6%) of the new entity, make Amtek less attractive compared with Frencken. Although smaller in size,

Frencken boasts a portfolio of blue-chip clients such as Valeo and Continental in Automotive, as well as engineering knowhow in the fields of medical, life sciences and semiconductors. Most importantly, the stock is trading at a 5.9x FY14 P/E and 0.55x FY14 P/BV, while its minimal gearing and strong earnings growth potential provide a good margin of safety.