Fu Yu Corp - UOB Kay Hian 2019-02-27: A Strong Finish For 2018; Raise Target Price By 6% To S$0.285

FU YU CORPORATION LTD (SGX:F13) | SGinvestors.io FU YU CORPORATION LTD (SGX:F13)

Fu Yu Corp - A Strong Finish For 2018; Raise Target Price By 6% To S$0.285

  • FU YU CORPORATION LTD (SGX:F13) reported a strong set of results, in line with our forecast. 2018 core PATMI grew 22% y-o-y due to robust growth in Singapore and Malaysia. Revenue grew for the first time after 5 years of decline, and gross margin is still rising.
  • Fu Yu aims to continue driving sustainable growth. We raise our target price to S$0.285 after incorporating a higher 2019F EV/EBITDA target of 5.7x, up from 5.3x, after the recent rally of the peers.
  • Maintain BUY.



2018 RESULTS


2018 results in line; core PATMI grew 22% y-o-y

  • FU YU CORPORATION LTD (SGX:F13)’s growth was driven mainly by increased sales in Singapore (+15.4% y-o-y) and Malaysia (+6.5% y-o-y).
  • Growth in Singapore was driven mainly by products in automotive, medical, and consumer segments while Malaysia recorded growth from the consumer and medical segments. The continued growth in gross profit was attributed to a shift in sales mix and Fu Yu’s continual efforts to streamline cost and raise operational efficiencies.

Robust cash flow and balance sheet, 2018 dividend yield remains attractive at 7.6%.

  • Operating cash flow before working capital for 2018 grew 58% y-o-y due to strong core PATMI growth and positive forex impact.
  • In addition, balance sheet remained robust, with net cash per share standing at S$0.11 or 52% of total market cap. Total dividend of S$1.6 S cents translates into a good dividend yield of 7.6%.

Continues to drive sustainable and profitable growth over the long term.

  • Fu Yu has highlighted four strategic initiatives to drive sustainable growth:
    1. strengthen its business development team to expand market share with existing customers and secure new customers in target market segments,
    2. diversify its customer base across target market segments to ensure greater business resilience and stability,
    3. focus on products that have longer life cycles and higher growth potential such as medical, automotive, eco-friendly and smart home consumer products, and 3D printers, and
    4. continually improve its operations to achieve optimal capacity utilisation, high production efficiency and lean cost structure.


STOCK IMPACT


BUY for high and sustainable dividend yield, cheap EV/EBITDA

  • Fu Yu offers a high and sustainable dividend yield of 8.1% for 2019 and we expect it to increase to 8.6% in 2020, on the back of improving net profit, FCF, and strong net cash position of S$80m/S$0.11 per share.
  • In 2018, Fu Yu raised its interim dividend for the first time in three years, and we expect further increases.

Takeover target for valuation, diversification, capacity and salary savings.

  • Fu Yu could be a takeover target given:
    1. its attractive valuation of 3.3x 2019F EV/EBITDA. Note that its peers have been privatised at an EV/EBITDA range of 5.0-25.7x in the past,
    2. Fu Yu’s geographically diversified plants and customers are highly sought after,
    3. Fu Yu’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 20-27% of 2018 net profit.


EARNINGS REVISION/RISK

  • We have kept our existing earnings forecast unchanged.


VALUATION/RECOMMENDATION


Maintain BUY and raise target price by 6% to S$0.285.

  • We raise our target price to S$0.285 after incorporating a higher 2019F EV/EBITDA target of 5.7x, up from 5.3x, after the recent rally of the peers.
  • Our target price implies a 2019F dividend yield of 6.0% and ex-cash PE of 11.3x.


SHARE PRICE CATALYST

  • Higher-than-expected net profit and dividend.
  • Potential takeover offer.
  • Potential corporate actions to unlock values such as disposal of properties.





John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-27
SGX Stock Analyst Report BUY MAINTAIN BUY 0.285 UP 0.270



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