Fu Yu Corp - Cash Cow Awaiting a Takeover Offer
- Fu Yu delivered excellent 4Q16 results, with NPAT rising 44.4% YoY to SGD5.6m. A 1 SGD cent dividend was declared. This brought total FY16 dividends to 1.5 SGD cents, which represents a 6.8% FY16 yield.
- Being in a net cash position and zero debt, coupled with its strong cash generation and low capex requirements, we believe the counter is an attractive privatisation/takeover candidate.
- We also think it can weather through the current tough macroeconomic environment. In addition, it continues to trim costs and improve margins.
- Maintain BUY, with a new DCF-based SGD0.27 TP (from SGD0.29, 29% upside).
An attractive privatisation/takeover target.
- Fu Yu Corp (Fu Yu) has a net cash of SGD0.14/share, zero debt, strong cash generation capabilities and low capex requirements.
- In addition, its NAV of SGD0.23/share (most of its factories/land are booked at cost) is significantly lower than the current market value.
- Peers like Broadway Industrial Group Ltd and Chosen Holdings Ltd were also recently acquired at much higher valuations. In addition to the recent wave of privatisation and acquisitions across the market, we believe the company is an attractive target for takeover by its industry peers.
Gross margins continue to improve.
- Given that Fu Yu’s FY16 gross margin improved to 16.3%, from 15.9% a year ago, we expect margins to continue to rise going forward. This is due the company’s ongoing cost-cutting measures and increased operational efficiencies, coupled with the switch towards higher margin projects.
Maintain BUY with a slightly lower DCF-backed SGD0.27 TP.
- We believe Fu Yu is an attractive privatisation/takeover candidate and would be able to weather through the current tough macroeconomic environment. Investors would also be paid with an attractive dividend yield of 6.8% while waiting.
- Maintain BUY with a slightly lower DCF-backed TP of SGD0.27 due to the tougher aforementioned environment.