Fu Yu Corp - RHB Invest 2020-02-28: Shanghai Factory’s Closure To Boost PATMI; BUY


Fu Yu Corp - Shanghai Factory’s Closure To Boost PATMI; BUY

  • Maintain BUY with a new DCF-backed Target Price of SGD0.32 from SGD0.29, 28% upside plus c.7% yield.
  • As one of our sector Top Picks, Fu Yu (SGX:F13)’s FY19 results exceeded expectations mainly due to the expansion of its gross margins to 19.7% from 17.8% in FY18, aided by higher margin projects and the lowering of costs from the closure of its Shanghai factory.
  • Recurring PATMI would have surged 54% to SGD18.3m, if not for the one-off expense incurred. We expect margins to be sustainable.

Redevelopment of Tuas factory.

  • The redevelopment project entails the demolition of the existing building and construction of a larger building to house a factory, warehouse and office space. The new building will have an estimated gross floor area of 9,000 sqm, which is more than three times the size of the existing building.
  • Management also plans to invest in new manufacturing equipment to expand production capacity and enhance its capabilities to produce higher precision and better quality products. The layout of the new building will also be modified to facilitate a seamless workflow across tooling, moulding and assembly operations.
  • Together with the investments in new and advanced production equipment, management expects to benefit from higher productivity and operational efficiency. Total capex will roughly be about SGD15.4m, internally funded, and targeted for completion by 4Q20.

Full year of cost savings from closure of Shanghai factory in FY20.

  • With the lease termination of its Shanghai site, management has decided to liquidate its Shanghai factory and shift production to its loss-making Suzhou site, which has lower operating costs.
  • We believe this will help reduce the longer-term operational cost for the whole group, and help the Suzhou factory turn profitable at a much faster pace despite having to incur a SGD5.5m one-off expense in FY19. As such, we remain confident of the group’s outlook and think that this closure will be beneficial to Fu Yu in the longer term. Capex for this project will likely be around SGD15.4m.

Stable and resilient.

  • With the ramp-up in its existing projects to continue in the subsequent quarters, coupled with further new projects in the medical, consumer and automotive fronts, we expect the positive growth momentum to continue.
  • In addition, a rising USD should also benefit the company. With its Shanghai factory closure and new redevelopment of its Singapore factory, we expect margins to improve. As a result, we increase our FY20F-21F core PATMI by 14% and 13% respectively, resulting in a new DCF-based Target Price of SGD0.32.
  • Fu Yu is also an attractive target for privatisation or acquisition.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
  • Key risks: economic slowdown and the US-China trade war worsening.

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-28
SGX Stock Analyst Report BUY MAINTAIN BUY 0.32 UP 0.290