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/
