Fu Yu Corp - An Attractive Privatisation Or Takeover Candidate
- With 74% net cash, we like Fu Yu for its cash generation, high FY17F dividend yield of 8.1% and strong balance sheet. Premised on these factors, we think it is a very attractive target for acquisition by overseas and local peers, or even private equity funds, especially after the recent takeover of Innovalues by the Northstar private equity group.
- Going forward, we expect Fu Yu to ride on the strong USD and continue to improve its margins from cost optimisation while it moves towards better- margin, lower-volume projects.
- Maintain BUY with a TP of SGD0.29.
An attractive privatisation/takeover target.
- With a strong financial position backed by a strong balance sheet and cash flow generation abilities, Fu Yu has net cash of 13 cents (SG)/share. This is further solidified with zero debt and a low capex requirement.
- Its NAV of SGD0.23/share – of which most of its fixed assets are booked at cost – implies that its valuations are significantly lower than its current market value. Its peers like Broadway and Chosen were recently acquired at much higher valuations.
- We believe that Fu Yu is an attractive target for a takeover/privatisation by larger industry peers.
Stronger USD a positive for Fu Yu.
- In 9M16, Fu Yu was hit by forex losses attributed to a weaker USD. As of 3Q16, it closed its USD/SGD rates at 1.36.
- The rates have risen to about 1.42 as of Nov 2016. As a result, we expect Fu Yu to record strong forex gains in 4Q16. For 4Q16, we expect the company to chalk better results, given the possibility of a stronger USD or devaluation of ASEAN currencies as its revenue is recorded in USD terms.
Improved gross margins.
- Cost-cutting measures coupled with the switch to higher-margin projects seem to be paying off, as Fu Yu’s 9M16 gross margin improved YoY to 16% from 14% (9M15).
- Going forward, we do expect depreciation costs to continue dropping, and margins improvement from further right-sizing of its China factories, as well as improving utilisation rate by getting more customers and projects with better profitability.
SGD100m net cash hoard – dividend yield of 8.1% for FY17F.
- Fu Yu set a minimum 50% NPAT payout dividend policy at the start of 2016. As of 3Q16, it paid out interim dividends of 0.5 cents. The company continues to generate positive cash flow from operations and this is likely to increase further in 4Q16.
- With its net cash hoard of SGD100m, we do expect management to continue to reward shareholders with more dividends on 4Q16.
- All in all, we expect a robust dividend yield of 8.1% for FY17.
Significantly undervalued at 3.5x ex-cash FY17F P/E – maintain BUY.
- We continue to like the company, given its improving core business, undemanding valuations and attractive dividend yield of 7.9% in FY16F.
- Key risks include a weakening USD and an economic recession