Fu Yu Corp - DBS Research 2017-03-03: Cash in on potential upside

FU YU CORPORATION LTD F13.SI

Fu Yu Corp - Cash in on potential upside

Challenging industry outlook but company-led initiatives could aid margin expansion and deliver growth.
Sustainable dividend of 1.5 Scts offers yield of 7.2%.
Currently trading at just 3.3x FY17F ex-cash P/E, Fu Yu appears attractive as a potential privatisation or takeover target.

With competition among existing players in the precision manufacturing space set to intensify and excess capacity in the region putting further pressure on prices, ongoing efficiency initiatives and targeted sales strategies employed by the group could grow top line by a modest 4-6% p.a. and aid operating margin expansion from 5.5% in FY16 to 7.2% in FY18.
Still at the early stage of its recovery and off a relatively low base, Fu Yu can deliver earnings growth of 18%/14% to S$12.5m/S$14.2m in FY17F/18F.

Meanwhile, we believe that strong cash flow generation capability, coupled with substantial net cash of S$105.6m (or 14 Scts per share), provides security of a 1.5-Sct dividend to be paid ahead.
The Stock Fair value of S$0.25 based on 6x FY17F ex-cash PE. With reference to local peers who are trading at c.8.4x ex-cash PE, we opine that Fu Yu should at least trade at 6x FY17F ex-cash P/E (vs 3.3x consensus EPS currently) given ongoing initiatives to expand margins and deliver robust growth, and value the counter at S$0.25.
At current prices, Fu Yu also offers an above average prospective yield of 7.2%.

While current valuations of 0.9x P/BV and 10.3x PE seem fair, Fu Yu looks attractive for its 7.2% yield and ex-cash PE of only 3.3x for FY17F (which is the lowest among its peer group), leading to potential for a privatisation or takeover offer.
A privatisation offer representing 20% premium would require only 82% of its net cash, while a takeout offer at premium of 20% would present an ex-cash acquisition PE of just 5.8x.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-03-03

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