Fu Yu Corp - CGS-CIMB Research 2019-02-27: ROE Needs To Improve


Fu Yu Corp - ROE Needs To Improve

  • Fu Yu’s FY18 revenue was in line at 97% of our full-year forecast while net profit was 7% above our forecast and 9% above consensus.
  • Average ROE was 7.22% in FY18 and y-o-y revenue growth was 1.4%. To rerate on a fundamental basis, Fu Yu has to deliver profitable revenue growth.
  • Maintain HOLD. Our Target Price of S$0.20 is based on 0.9x FY19 P/BV.

FY18 net profit was above our estimate

  • FU YU CORPORATION LTD (SGX:F13)’s FY18 net profit beat our forecast, driven by a better sales mix and lower operating costs. In line with our fears that 3Q18 gross profit margin of 20.2% may not be sustainable, Fu Yu’s gross profit margin (GPM) eroded to 18.1% in 4Q18.
  • Non-operating items that helped FY18 results were
    1. S$0.9m gain on disposal of equipment, and
    2. forex gain of S$1.2m.
  • In terms of sales mix, Fu Yu is making progress in growing revenue from better margin products in the consumer, medical and automotive segments.

Dividend thesis remains intact

  • Our HOLD call based on our dividend yield thesis remains intact. Fu Yu declared a final DPS of 1.0 Scts. Together with the interim DPS of 0.6 Scts, full-year DPS increased to 1.6 Scts: effectively almost a 100% dividend payout. Fu Yu’s balance sheet remains strong with net cash of S$84m (net cash per share of S$0.11) as at end-Dec 18.
  • Capex requirements are likely to remain low, allowing the company to meet our dividend expectations. A risk to our dividend forecast would be sizeable M&As.

Key risks

  • The impact of the US-China trade war on economic growth remains a worry though Fu Yu reported that there was no negative impact from the trade tensions in FY18. Current key concerns are
    1. intensifying industry competition,
    2. pressure on selling prices, and
    3. foreign exchange rate risk.

HOLD for yield; two possible re-rating catalysts

  • We raise our FY19-20F EPS forecasts as we assume a higher 17.8% GPM (previously 17.0%). We deem this to be generous as we believe that a sustainable gross profit margin range is likely 15.0-18.0%.
  • We think investors should HOLD Fu Yu for its 7.6% dividend yield.
  • Downside is limited, with 53% of its market cap backed by its net cash (zero debt) position. If Fu Yu is able to grow revenue and maintain its gross margin, we can expect further ROE improvements to drive its share price re-rating. Any third-party interest in acquiring and privatising Fu Yu would be a bonus for shareholders (see Figure 4 in attached PDF report for possible valuation based on a recent privatisation deal).
  • Maintain HOLD. Our Target Price of S$0.20 is based on 0.9x FY19 P/BV, its 3-year average.

Willam TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-27
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.200 SAME 0.200