Fu Yu Corp - RHB Invest 2019-11-14: Strong 3Q19 Despite One-Off Expense; BUY


Fu Yu Corp - Strong 3Q19 Despite One-Off Expense; BUY

  • We have a firm BUY on this small/mid-cap manufacturing Top Pick, Target Price of SGD0.24 implies 7% upside with 8% FY20F yield.
  • FU YU CORPORATION (SGX:F13) had a resilient 3Q19, despite incurring a SGD4m one-off expense from the Shanghai factory closure. 9M19 PATMI held steady, at SGD8.9m. See Fu Yu Announcements.
  • We expect continued revenue and margin expansion on new projects into the auto, consumer and medical spaces. As over 80% of revenue is in USD terms, it should also benefit from the strengthening of the greenback.

Gross margins expanded in 9M19.

  • Topline dipped by 1% y-o-y. However, excluding one-off expenses, GPM improved to 20.7% from 17.8% a year ago, also on higher margins from automotive and medical projects. This uptrend will likely continue, as Fu Yu Corporation is set to enjoy higher contributions from new projects from the medical sector, which are currently ramping up.

Attractive 7.1% FY19F yield.

  • With a sound balance sheet (net cash of SGD80.1m), positive operating cash flow of SGD15-20m a year and an improving business, we expect Fu Yu Corporation to continue rewarding shareholders with higher and more attractive dividends.
  • Management maintained its 9M interim dividend at SGD0.6 cents, representing a yield of 7.1% for FY19F. See Fu Yu Dividend History.

Ramp-up in existing projects

  • With the ramp-up in existing projects to continue in the subsequent quarters, coupled with further new projects in the medical and consumer and automotive fronts, we expect the positive growth momentum to continue. In addition, an appreciating USD should also benefit the company.
  • Management is still actively seeking ways to further optimise the cost structure of its operations in the region, especially in China – such as right-sizing exercises and selling/leasing unutilised factory space if suitable opportunities arise, which will further improve margins.
  • Supported by an attractive yield, we maintain BUY with an unchanged DCF-backed Target Price of SGD0.24. Fu Yu Corporation is also an attractive target for privatisation or acquisition. See Fu Yu Share Price; Fu Yu Target Price.
  • Key risks to our call: economic slowdown, trade war worsening.
  • RHB is one of two brokers covering this counter. See Fu Yu Analyst Reports.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-11-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.240 SAME 0.240