RHB Research 2015-07-09: Fu Yu Corp - Treasure Chest Unlocked. Maintain BUY.

Treasure Chest Unlocked

  • With over 99% of shareholders approving the capital reduction resolution in its AGM recently, which will remove the accumulated losses position via an SG 0.5cents/share payout, the company will be able to pay dividends going forward. 
  • We expect a 6% maiden dividend yield for FY15. 
  • We think FY15 will likely be a key inflection point to reap gains for this treasure chest. 
  • Maintain BUY, with DCF-backed SGD0.30 TP (58% upside)

 Capital reduction approved – future dividends expected. 

  • At its recent AGM, over 99% of Fu Yu’s shareholders approved the capital reduction resolution. This will remove the accumulated losses position via an SG 0.5 cents/share payout. 
  • In addition, the company will be able to pay dividends going forward and we expect a 6% maiden dividend yield for FY15. 

 Additional cost-cutting could lead to margin boost. 

  • We expect Fu Yu’s gross margin to improve significantly to a conservative 13.9% in FY15 from 12.2% in FY14. 1Q15 gross margin actually improved to 14.8% from 8.9% in 1Q14, which further substantiates our view. 
  • Going forward, we believe projects with better margins from its precision injection moulding and tooling segments, the increase in automated processes, and more cost-cutting from its China factories should continue to contribute positively to gross margins.

 A robust FY15 ahead. 

  • We believe FY15 could be a record year for Fu Yu, with NPAT levels not seen since FY04. 
  • With margins recovering on cost-cutting, restructuring efforts and higher-margin projects, we expect about 39% YoY NPAT growth for FY15 (FY14: 28.5%). 
  • In addition, the expected pick-up in Singapore and China business should also contribute positively to earnings, and we expect revenue contribution growth from the medical, environment and automobile products segments. 
  • The company is also keen to expand contributions from the automobile sector and is already in project talks with several parties at the moment. 
  • With rich cash flow generation from operations of SGD20m- 30m a year, we think Fu Yu is a cash cow ready for milking and FY15 will likely be a key inflection point. 
  • Maintain BUY with a DCF-backed TP of SGD0.30 (WACC: 12%, TG: 0%). 

(Jarick Seet)

Source: http://www.rhbgroup.com/




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