Fu Yu Corp - UOB Kay Hian 2019-11-29: Optimisation Of Business Lifts Earnings


Fu Yu Corp - Optimisation Of Business Lifts Earnings

  • Management has actively taken steps to achieve cost efficiencies, including its strategic decision to shift operations in Shanghai to its Suzhou factory which should help lower overheads and improve utilisation. Excluding one-off expense from the shift, 3Q19 results were good, mainly due to gross margin expansion of 4.6ppt y-o-y (excluding one-off).
  • We raise our 2019-21 net profit forecasts by 8.8-9.4% as we adjust margin assumptions.
  • Maintain BUY with a higher target price of S$0.295.


Continued efforts to optimise operations led to cost savings.

  • FU YU CORPORATION (SGX:F13)'s management has been actively taking steps to achieve cost efficiencies. These included its strategic decision to shift operations in Shanghai to its Suzhou factory which has a larger production capacity and is ideally located to serve its customers in Shanghai. We believe the shift will help improve utilisation and lower overheads. See Fu Yu Announcements; Fu Yu Latest News.
  • The closure of the Shanghai factory resulted in a one-off expense of S$4m recognised in 3Q19. Excluding this one-off expense, 3Q19 results came in above expectations with core net profit surging 57% y-o-y.

Bottom-line growth driven by gross margin expansion.

  • While revenue declined marginally by 2.2% y-o-y in 3Q19, the strong beat in its latest results was mainly due the increase in gross margin, estimated at 24.7% (excluding one-offs) in 3Q19 vs 20.2% in 3Q18. This was largely the result of a shift in sales mix, as well as ongoing initiatives to achieve better cost and operational efficiencies.
  • Fu Yu registered higher sales of consumer and medical products as well as power tools for 9M19 which we believe has helped lift gross margins and offset the weaker demand from the printing & imaging segment.

Dividend yield remains attractive at 7.2%.

  • The group declared a second interim dividend of 0.25 S cents per share, bringing total dividends for 9M19 to 0.60 S cents (same as 9M18), representing a dividend payout of 50.4%. We estimate full-year dividend of 1.7 S cents, translating into an attractive yield of 7.2%. See Fu Yu Dividend History.
  • Balance sheet remained robust, with net cash per share standing at S$0.11, or 48% of market cap.

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

  • Fu Yu could be a takeover target, given:
    1. its attractive valuation at 3.2x 2020F EV/EBITDA. Note that its peers have been privatised at EV/EBITDA of 5.0-25.7x in the past;
    2. its geographically diversified plants while its customers are highly sought after;
    3. low utilisation rate of only around 50%, which 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 at S$2.3m-3.0m annually. or 21-28% of 2018 net profit.


Well positioned to capture business opportunities and withstand challenges.

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


  • We raise our 2019-21 net profit forecasts by 8.8-9.4% as we adjust our gross margin assumption.


  • Maintain BUY with a higher target price of S$0.295, pegged to peers’ average of 5.5x 2020F EV/EBITDA (previously 5.7x 2019F EV/EBITDA) as we roll valuation to 2020. Our target price implies a dividend yield of 7.2% and 2020 ex-cash PE of 5.8x. See Fu Yu Share Price; Fu Yu Target Price.


  • 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/ 2019-11-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.295 UP 0.285