Fu Yu Corp - RHB Invest 2016-04-20: Feedback Is Positive

Fu Yu Corp - RHB Invest 2016-04-20: Feedback Is Positive FU YU CORPORATION LTD F13.SI 

Fu Yu Corp - Feedback Is Positive 

  • We brought Fuyu, one of the top four jewels in our top 25 small-mid cap book (launched yesterday), to meet fund managers/investors on a non- deal roadshow that lasted a day. 
  • We received positive feedback, and management addressed key concerns surrounding its business and dividends. 
  • Going forward, it may likely adopt a more cost-down approach for its factories in China – especially its Dongguan and Suzhou plants. 
  • Management reiterated its stance to have a higher payout ratio than FY15’s 80%. 
  • Maintain BUY with a SGD0.29 TP (35% upside). 

Growth from medical, filtration and automotive industries. 

  • After three years of declining revenue, Fuyu aims to increase its topline this year. 
  • However, it would still be focusing on products that yield higher margins – especially in the medical, filtration and automotive space. 
  • Currently, only less than 5% of its revenue comes from the automotive industry. 

Higher payout ratio than 80%. 

  • Fuyu has implemented a dividend policy of paying out at least half of its PATMI. 
  • Last year, it paid out 80% of net profit. 
  • Going forward, we think that it is likely to pay out a larger percentage, eg 100% of earnings, due to its strong cash-generative operations that generate about SGD20m-30m a year, as well as its strong net cash position which represents about 70% of its current market capitalisation. 

More cost-cutting for China plants. 

  • Management highlighted that it has two large-capacity plants in Dongguan and Suzhou that are heavily underutilised and incurring sizeable losses at the moment. 
  • It is now implementing cost- cutting/right-sizing measures on these plants – much like what it did to turn around its Malaysian operations earlier. 
  • Without these losses dragging down the group’s earnings, we expect lower depreciation expenses as well as higher margins and profits just from this cost-cutting exercise alone. 

Share buyback programme likely to be implemented. 

  • With the excess cash, we think that management is likely to use some of it to implement a share buyback programme, coupled with a pro-shareholder active dividend policy in order to meet the minimum trading price of SGD0.20 as required by SGX. 
  • Key risks are a depreciation of the value of the USD and an economic recession. 

Maintain conviction BUY with a DCF-backed TP of SGD0.29. 

  • Fuyu is a safe haven that is cash-rich. It also has strong cash flow generation and high dividend yield (10.5% in FY16F). 
  • We also think that Fuyu is an attractive takeover target, especially by its peers. 
  • Maintain BUY, with a DCF-backed TP of SGD0.29, implying 12.8x FY16F P/E.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-04-20
RHB Invest SGX Stock Analyst Report BUY MAINTAIN BUY 0.29 Same 0.29