Fu Yu Corp 2Q19 - UOB Kay Hian 2019-08-14: Results In Line With Gross Margin Expansion & Higher Dividend

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FU YU CORPORATION LTD (SGX:F13)

Fu Yu Corp 2Q19 - Results In Line With Gross Margin Expansion & Higher Dividend

• Fu Yu's 2Q19 core PATMI (+106% y-o-y) was in line with our forecast; 1H19 met 48% of our full year estimate. Gross margin continued to increase (+2.4ppt y-o-y), mainly due to a better product mix and increased contributions from higher-margin market, Malaysia.
• A higher dividend of 0.35 S cents/share was declared, up from 0.30 S cents/share, in line with our forecast of 1.70 S cents/share for 2019.
• Fu Yu aims to continue driving sustainable growth. Maintain BUY and target price of S$0.285.

2Q19 RESULTS

2Q19 results in line; core PATMI grew 106% y-o-y.

• FU YU CORPORATION LTD (SGX:F13)’s growth was driven mainly by increased sales in the consumer and medical segments offsetting the weaker demand from the printing and networking & communications segment. Malaysia (+5.9% y-o-y) and Singapore (+0.8% y-o-y) sales continued to grow. However, sales under China operations fell 4.9% y-o-y, mainly due to lower sales in the printing and networking segments.

Robust cash flow and balance sheet; 2019F dividend yield remains attractive at 7.9%.

• Operating cash flow before working capital after adjusting for the new SFRS 16 for 2Q19 grew 72% y-o-y due to strong core PATMI growth and a positive forex impact. In addition, balance sheet remained robust, with net cash per share standing at S$0.11 or c.50% of total market cap.
• Total dividend of 1.7 S cents translates into a good dividend yield of 7.9%. See Fu Yu's dividend history.

Well-positioned to capture business opportunities and withstand challenges.

• Fu Yu maintained its strategy of having broad diversity in its product portfolio to deliver stable and sustainable growth over the long term. It has put its 40% JV in Malaysia under a voluntary liquidation process in Jul 19; the JV incurred a loss of S$0.8m in 2018 and this is expected to generate considerable savings from 2H19 onwards.
• On the other hand, Fu Yu will be renewing its lease for its Singapore plants to further strengthen its operations.

STOCK IMPACT

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

• Fu Yu offers a high and sustainable dividend yield of 7.4% for 2018 and we expect it to increase to 7.9% in 2019F, on the back of improving net profit, FCF and strong net cash position of S$82.4m (S$0.11 per share) as of 2Q19.
• In 2018, Fu Yu raised its interim dividend for the first time in three years, and we expect further increases.

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

• Fu Yu could be a takeover target given:
  1. its attractive valuation of 3.5x 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 21-28% of 2018 net profit.

EARNINGS REVISION/RISK

• We have kept our existing earnings forecast unchanged.

VALUATION/RECOMMENDATION

• Maintain BUY and target price. Our target price of S$0.285 is based on 5.7x 2019F EV/EBITDA, pegged to peers’ average. It implies a 2019F dividend yield of 7.9% and ex-cash PE of 6.7x.

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/ 2019-08-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.285 SAME 0.285