Fu Yu Corp - DBS Research 2020-02-25: Earnings Recovery Slightly Delayed


Fu Yu Corp - Earnings Recovery Slightly Delayed

  • Fu Yu's FY19 results above expectation; 4Q19 net profit was more-than-double our projection.
  • 4Q19 revenue declined 10.1% y-o-y, normalised gross profit margins improved to 25.6%.
  • Final dividend of 1.0Sct/share, attractive yield of 6.3%.
  • Maintain BUY and Target Price of S$0.35.

FY2019 results above expectations boosted by margin expansion

  • Fu Yu (SGX:F13)'s 4Q19 earnings of S$3.7m (+27.4% y-o-y, -4.4% q-o-q) was more-than-double the market estimate of S$1.5m. The continued improvement in normalised gross profit margins was better than expected with a 5.5ppt jump from 2Q19 to 3Q19.
  • FY2019 reported PATMI was S$12.69m (+6.8% y-o-y), while core PATMI (excluding one-off expenses from the closure of its Shanghai plant) jumped 54% y-o-y to S$18.3m on the back of higher gross profit margin and reduction in operating expenses as a percentage of revenue.

4Q19 revenue decreased to S$46.1m (-4.1% y-o-y, -10.1% q-o-q).

  • The decline was largely due to softer sales in Singapore and Malaysia. On a full year basis, revenue declined by a modest 1.8% to S$194.1m (vs expectation of S$197.3m). The decline in sales from China (-6.0% y-o-y) and Singapore (-2.0% y-o-y) was more than offset by an increase from Malaysia (+10.6% y-o-y).

Margins continued to improve through cost enhancement initiatives.

  • Fu Yu's 4Q19 normalised gross profit margins increased from 24.8% in 3Q19 to 25.6% in 4Q19 due to a better sales mix and efforts to improve efficiency. For the full year FY19, normalised gross profit margins increased by 4ppts to 21.9% on cost control measures, operational efficiencies, and better sales mix.
  • Overall, FY19 results were above expectations on margins improvement.

Final dividend of 1.0Sct/share, maintaining its high dividend payout ratio.

  • With its healthy cash flow and financial position, Fu Yu has declared a final dividend of 1.0Sct/share, bringing full year dividend to 1.6Scts/share (vs 1.6Scts/share in FY2018). Its payout ratio is 95.0% of its reported PATMI. Fu Yu’s full year dividend yield remains attractive at 6.3%.

Outlook and Recommendation

Novel coronavirus (COVID-19) to negatively impact revenue and earnings in FY20.

  • With the COVID-19 outbreak in late January in China, the group’s manufacturing operations in China had to remain closed after the Lunar New Year holidays. Fu Yu’s factories in China have subsequently resumed operations from mid-February 2020. With the cessation of its Shanghai factory, Fu Yu has four (out of a total of seven) plants operating in China.
  • Revenue derived from China accounted for c.54.4% of group revenue in FY2019. Hence, given the period of shutdown and current situation of the outbreak, we estimate the slowdown in economic activity will reduce FY2020’s revenue by 13.1% to S$174.7m.

Slight impact to FY2020F earnings, raising earnings in FY2021/22F.

  • Maintain BUY and Target Price of S$0.35, with an attractive dividend yield of 6.3%. New cases have peaked in China, but the severity and timeframe surrounding the outbreak remains uncertain with an increase in new cases outside of China.
  • We have trimmed FY2020F normalised earnings by c.3% to S$14.3m on the back of a downward revision in revenue, slightly offset by and upward revision in margins.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
  • We continue to be positive on earnings growth in FY2021F/22F driven by a recovery in manufacturing activity and margins expansion. We have raised FY2021F/22F earnings by 9%/8% as we impute higher gross profit margins of 22.8%.
  • The stock currently trades at 11.8x on rolling 12-month forward PE, which is -0.3SD its 4-year average of 12.9x.
  • With the group’s strong operating cash flows and financial position, we believe Fu Yu will be able to maintain its dividend of 1.6Scts in FY2020F, which represents an attractive dividend yield of 6.3%.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-02-25
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