Frencken Group is enjoying its status as a favoured stock among Singapore-listed semiconductor companies. However, group president Dennis Au emphasises that the company is “technology-related” across all its business segments, without prioritising one segment over another.
The mechatronics division is Frencken’s answer to providing a one-stop solution for the design, development and production needs of its diverse range of customers. The company’s core competencies are in electromechanical assemblies and high-precision part manufacturing. “If you look at our mechatronics segment, we have semiconductor, medical, healthcare, life sciences and industrial automation.
Across these sub-segments, we harness our core competency, which is focused around a few technology areas in which we are very strong, including working in extreme environments,” says Au.
“These include manufacturing in a vacuum, at high temperatures, low temperatures, with very precise movements, with very precise dimensions and a lot of repeatability — that’s the strength of our mechatronics division.”
In FY2023, Frencken’s revenue from the semiconductor segment made up $282.4 million or 43.7% of the mechatronics division’s $646.2 million revenue, down 7.4% y-o-y, due to the industry’s cyclical downturn.
In the most recent 1QFY2024 ended March, revenue from this segment was up 37.4% y-o-y to $79.5 million, driven by strong sales to a key European customer and a modest sales increase from the Asia operations. The company expects semiconductor revenue in 1HFY2024 to be higher than that of 2HFY2023.
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Au is no stranger to the volatility. He believes running a diversified portfolio of businesses helps improve the company’s overall resilience. “It is for diversity and an‐ other pillar to support long-tail revenue, with not too bad margins as well,” he adds.
On the other hand, Frencken’s revenue from its medical segment in FY2023 grew 11.4% y-o-y to $120.2 million. Likewise, its analytical and life sciences segment increased 15.2% y-o-y to $169.8 million. The growth of these two segments continued in 1QFY2024 with medical up 8.6% y-o-y to $32.7 million and life sciences up 16.7% y-o-y to $46.6 million.
Dutch medical giant Philips, which outsources work to Frencken, is an example of what Au calls a “long-tail” customer. For example, the CT scan patient table Frencken builds for Philips has been in place for the last 10 years and is not about to become obsolete as new models will need to pass numerous regulatory hoops of major US, European and Chinese jurisdictions. Frencken’s smaller industrial automation segment suffered a 45.2% y-o-y drop in revenue to $60.1 million in FY2023 while 1QFY2024 revenue was down 49.5% y-o-y to $9.4 million.
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The company attributes the drop to lower orders from leading hard disk maker Seagate. Accordtechning to Frencken, revenue from this segment is “typically lumpy” and dependent on Seagate’s capital expenditure.
Au views the storage industry as undergoing a technological inflection point. As the storage capacity of hard disks gets bigger, the sales volume of drives from the likes of Seagate drops even though absolute storage capacity is up. “We are impacted by how much money they spend on building production lines.”
While Frencken’s mechatronics division continues to be its main revenue driver, its integrated manufacturing services (IMS) division is the modern-day iteration of its original business despite its modest $93.8 million FY2023 revenue.
One of the earliest services provided by the IMS division was to manufacture keypads for Nokia. Over time, Frencken has moved away from servicing the consumer electronics industry to “higher value” areas such as the automotive industry.
Today, Au says the IMS division is undergoing another transformation phase, departing from simple plastic moulding to more advanced processes, such as combining different plastic parts to form more complex components, allowing Frencken to sit higher in the value chain.
If Frencken can make only 1% off an order of $1 billion, that is still a lot of money. But if the order was only $100 million and still the same margin, then it is not worth doing, he adds.
Ultimately, Frencken keeps its competitive edge through what Au calls “stacking value” for many of its customers, with the end goal, if possible, of becoming the designer and manufacturer of an entire product instead of merely components. “Doing this, we create a lot of stickiness with a customer so it is not easy for a customer to say ‘I’m going to move away to someone else’ because the value chain is pretty much established as a stack rather than an individual component.”
