Fu Yu Corp (FUYU) - UOB Kay Hian 2018-11-27: Optimised Operations Backed By 9% Dividend Yield

FU YU CORPORATION LTD (SGX:F13)

Fu Yu Corp (FUYU) - Optimised Operations Backed By 9% Dividend Yield

FUYU’s shift to a more diversified and sustainable customer base should continue to boost gross margin and profitability. Its recent optimisation of operations in Malaysia, Singapore and potential turnaround of two China plants could lift profitability.
We expect a 3-yr EPS CAGR of 14% for 2017-19F.
Initiate coverage with BUY and target price of S$0.27, based on 5.3x 2019F EV/EBITDA, pegged to peers’ average. It implies 2019F ex-cash PE of 10.4x.
FUYU offers a high dividend yield of 8.5%/9.0% for 2018/19F, with net cash forming 53% of its market cap.
Refer to the 20-page PDF report attached for complete analysis on Fu Yu Corp.

FUYU started as a plastic moulding and tooling fabrication factory in 1978 located in Singapore. It was listed on the SGX Mainboard in 1995. Today, it has 10 manufacturing plants across Singapore, Malaysia and China that provide vertically integrated manufacturing services.
Leveraging on its extensive operating history, Fu Yu has built a broad and diversified customer base of blue chip companies in the printing and imaging, networking and communications, consumer, medical and automobile sectors. To enhance its value add to customers and build mutually beneficial long-term partnerships, the group offers a one-stop solution to customers through its vertically integrated services.
Fu Yu's capabilities range from precision tool design and fabrication, precision injection moulding to secondary processes, such as silk screen printing, ultrasonic welding, heat staking and spray painting, as well as sub-assembly.

FUYU targets to deliver its vision through embracing technology and creativity, providing satisfaction to its customers, continuous learning for its people, and maximising returns to its shareholders.

Fu Yu Corp (FUYU) offers a high and sustainable dividend yield of 8.5% for FY18 and we expect it to increase to 9.0% in FY19, from improving net profit, free cash flow (FCF) and strong net cash position of S$75m/S$0.10 per share, which is equivalent to 53% of market cap as of 3Q18.
FUYU trades at a cheap FY19F EV/EBITDA of 2.9x. In 2Q18, FUYU raised its interim dividend for the first time in three years and we expect a further increase.
Our target price of S$0.27 is pegged to 5.3x FY19F EV/EBITDA, based on peers’ average. It implies FY19F ex-cash PE of 10.4x and dividend yield of 6.4%.

In the past decade, FUYU relied heavily on customers in traditional industries such as printing and communications. However, it has reduced its revenue concentration on the printing segment from 50% in FY11 to 31% in FY17.
Leveraging on its capabilities, the company has diversified to a more stable customer base (products that have longer life cycles):
1. eco-friendly home consumer products,
2. medical products, and
3. automotive parts.

FUYU has taken four key steps to optimise its business:
1. competed the privatisation of its 71%-owned Malaysia-listed subsidiary, LCTH in 2Q18, with additional full-year earnings contribution and savings from regulatory compliance costs expected to be around S$1.0m,
2. terminating a JV which is losing S$0.7m a year
3. turning around two out of five loss-making plants in China, and
4. the amalgamation of two subsidiaries in Singapore in 1Q17 has helped to deliver cost synergies of around S$1.0m.

FUYU could be a takeover target given:
1. its attractive valuation of 2.9x 2019F EV/EBITDA. Its peers have been privatised at an EV/EBITDA range of 5.0-25.7x in the past,
2. FUYU’s geographically diversified plants and customers across Singapore, Malaysia and China are highly sought after, especially during this period of uncertainty,
3. FUYU’s low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity, and
4. low-hanging fruit from the savings of three co-founders’ remuneration, estimated to be around S$2.3m-3.0m p.a. or 21-28% of 2018 core net profit.

Our target price is based on 5.3x 2019F EV/EBITDA, pegged to peers’ average. FUYU offers a high dividend yield of 8.5% for 2018 and we expect it to increase to 9.0% for 2019. This will be supported by net profit growth, robust FCF and its strong net cash position that is equivalent of 56% of market cap as of 3Q18.
In 2Q18, FUYU raised its interim dividend for the first time in three years and continued to raise it in 3Q18. Our target price of S$0.27 implies 2019F ex-cash PE of 10.4x and dividend yield of 6.4%.

We estimate that 2018 dividend per share of 1.6 S cents or S$12.0m payout is sustainable. The dividend translates into 110% of payout ratio for 2018, and its FCF of S$12.4m is sufficient to cover the dividend. In addition, retained earnings of S$61.5m and net cash position of S$77.3m could sustain the dividend payout for many years.
For 2019, the dividend per share should increase to 1.7 S cents or S$12.8m payout, which translates to 105% payout ratio, and FCF should increase to S$12.6m.
To recap, FUYU announced a dividend policy of at least 50% payout of its net profit in 2015, but it has been paying out 99-130% of its core net profit from 2015-17.

FUYU raised its interim dividend for the first time in three years in 2Q18 and 3Q18, from 0.25 S cents to 0.30 S cents per share each quarter. We see potential upside to our 2018 dividend forecast of 1.6 S cents per share, given the high net cash position of FUYU.
In addition, the dividend hike implies a positive signal for its future performance.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-27

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