Fu Yu Corp - RHB Invest 2018-08-15: The Time Is Now

FU YU CORPORATION LTD SGX:F13

Fu Yu Corp - The Time Is Now

We had been waiting for more positive signs before reaffirming Fu Yu’s growth, and the firm delivered in 2Q18.
Fu Yu Corp’s 2Q18 topline rose 7.4% y-o-y while PATMI surged 553% y-o-y. This was accompanied by a gross margin improvement of 16.9% from 15.5%, driven by higher-margin new projects in the automotive, consumer and medical segments.

The privatisation of its Malaysian subsidiary also boosted PATMI, backed by an attractive 9.2% yield.

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Upgrade to BUY from Neutral with a higher DCF-backed SGD0.22 Target Price from SGD0.20, 29% upside, as we raise FY18F PATMI 49.2%.

Fu Yu Corp’s 2Q18 topline rose 7.4% y-o-y to SGD50.8m, while PATMI surged 553% y-o-y to SGD4m.
Gross margins also improved to 16.9% from 15.5%, driven by higher-margin new projects in the automotive, consumer and medical segments. We expect the ramp-up of these projects to accelerate in subsequent quarters, especially in 3Q18. As a result, we do expect better margins for the remaining quarters of 2018.

This is despite profits declining in the past few years and the firm paying out > 100% of profits as shareholder dividends, coupled with the recent privatisation of LCTH Corp, which took > SGD20m. The latter’s privatisation exercise also contributed to Fu Yu’s PATMI boost due to an improvement in its Malaysian operations.
To reward shareholders on the company’s fine performance, management declared an increased interim dividend of SGD0.003 from SGD0.0025.
All-in-all, we expect Fu Yu to increase its dividends for FY18 to SGD0.016 from SGD0.015, representing an attractive dividend yield of 9.2%.

With higher-margin new projects being secured in the automotive, consumer and medical segments – coupled with the ramp-ups expected in 3Q18 and 4Q18 – we expect topline and profitability to continue to trend upwards in subsequent quarters. This should be accompanied by margin improvements.
In addition, we understand that Fu Yu is still trying to secure new customers and has not yet been impacted by the trade war between China and the US – this is despite having factories in China.
Accompanied by an attractive 9.2% dividend yield, we lift our FY18F PATMI estimates by 49.2% and upgrade our call with a higher DCF-backed Target Price of SGD0.22 from SGD0.20, 29% upside.
Key risks to our call are a slowdown in the economy and the US-China trade war worsening.
RHB is the only broker covering this counter.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-08-15

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