Fu Yu Corporation - RHB Invest 2017-05-09: Disappointing 1Q17 – Hold For Attractive Dividends

FU YU CORPORATION LTD F13.SI

Fu Yu Corporation - Disappointing 1Q17 – Hold For Attractive Dividends

Fu Yu reported disappointing 1Q17 results, mainly due to the slowdown in China and Malaysia.
Gross profit margin remained steady at 16.7% on the back of lower depreciation charges as well as its continual efforts to manage costs and achieve efficient utilisation of its manufacturing facilities. However, the continued drop in revenue is discouraging, especially when its peers are faring much better.

As a result of a dimmer outlook, we lower our FY17F NPAT by 14.5%. Downgrade to NEUTRAL (from Buy) with a lower DCF-based TP of SGD0.23 (from SGD0.27, 0% downside).

Fu Yu Corp (Fu Yu) reported a disappointing quarter, mainly due to a slowdown in China and Malaysia by 12.2% YoY and 30.8% YoY respectively.
Gross profit margin remained steady at 16.7% on the back of lower depreciation charges and its continual efforts to manage costs and achieve efficient utilisation of its manufacturing facilities.
Singapore remained strong and suffered only a marginal dip YoY.

As at 1Q17, Fu Yu maintained a strong balance sheet backed by a net cash position of SGD101.8m. This is despite paying over 90% of its NPAT as dividends in the past two years.
It continues to generate a healthy amount of free cash flow due to the lower depreciation and capex.

Despite a drop in earnings, we feel that a dividend payout of 1.5 cents a share is still feasible for Fu Yu. This is due to its strong balance sheet and a healthy net cash position of SGD101.8m.
A 1.5cents payout would represent an attractive FY17F dividend yield of 6.5%

Fu Yu has a net cash of SGD0.135/share, zero debt, strong cash generation capabilities and low capex 15 requirements.
In addition, its NAV of SGD0.227/share (most of its factories and 10 land are booked at cost) is significantly lower than the current market value.
5 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.

It has been a disappointing 1Q17 for Fu Yu, below our expectations.
With its peers faring much better in the current climate, coupled with the discouraging decline in revenue, we lower our FY17F NPAT by 13% and resulting in a lower DCF-based TP of SGD0.23. However, we still like its cash generation and strong balance sheet.
We believe that Fu Yu is an attractive takeover target by regional peers wanting access into South-East Asia.
Key risk is a slowdown in demand from customers.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-09

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