Fu Yu Corp - RHB Invest 2018-05-16: Revenue Growth Signs Encouraging

FU YU CORPORATION LTD SGX: F13

Fu Yu Corp - Revenue Growth Signs Encouraging

Maintain NEUTRAL, as we decrease our DCF-backed Target Price of SGD0.20 (8% upside) from SGD0.23, after trimming FY18F PATMI by 5% to account for a weaker USD in 1Q18.
Despite that, Fu Yu is seeing encouraging signs in topline growth, which may mean that its revenue decline has bottomed out.
Its balance sheet remained sound, with a cash balance of SGD98.5m and zero debt, accompanied by an attractive FY18F yield of 8.1%.
Being conservative, we prefer to wait for more positive signs before reaffirming its growth, but investors can hold on to the stock for its attractive dividends.

Fu Yu’s 1Q18 topline grew 3.6% y-o-y to SGD46.4m, as operations in Singapore and Malaysia generated higher sales of products in the printing & imaging and medical segments respectively. This may potentially mean that its revenue decline – which has plagued the company for the past few years – may have bottomed out.
Its 1Q18 gross margin dipped to 16% (from 16.7% in 1Q17) due to a shift in sales mix as well as pressure on selling prices for certain products.
A weaker USD also resulted in a forex loss incurred by the group.

Fu Yu has a strong balance sheet with a net cash of SGD98.5m and zero debt – even though its profits declined in the past few years and it paid out over 100% of profits as shareholder dividends. We think that management may continue to reward shareholders with attractive dividends, resulting in an attractive FY18F yield of 8.1%.

Fu Yu has net cash of SGD0.134/share, zero debt, strong cash generation capabilities and low capex requirements. In addition, its NAV of SGD0.225/share (most of its factories/land are booked at cost) is significantly lower than the current market value.
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 a takeover by its industry peers.

We pare down our FY18F NPAT by 5% to account for a weaker USD in 1Q18 – which leads to a lower DCF-backed Target Price of SGD0.20. However, we still like the group’s cash generation and sturdy balance sheet.
We also believe that it is an attractive takeover target by regional peers that may want access into the South-East Asian market.
Fu Yu offers an attractive dividend yield of 8.1% for FY18F. Being conservative, we prefer to wait for more positive signs to reaffirm its growth, but investors can hold on to its shares for attractive dividends.
A key risk to our call is a slowdown in the economy

Jarick Seet RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-16

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