Fu Yu Corp - CGS-CIMB Research 2020-03-04: Improving Roes


Fu Yu Corp - Improving Roes

  • Fu Yu’s FY19 core net profit was in line with our expectations at 101% of our full-year forecast.
  • Final DPS of 1.0 S cts declared. Balance sheet remains strong with net cash (zero debt) of S$88.5m.
  • We reiterate our HOLD call with a higher Target Price of S$0.26 driven by ROE improvement.

FY19 core net profit in line

  • Fu Yu Corp (SGX:F13)'s FY19 core net profit was in line at 101% of our full-year forecast. Revenue growth remains challenged with revenue down 4.1% y-o-y in 4Q19 and 1.8% y-o-y in FY19. However, as a result of its ongoing consolidation efforts and better sales mix, gross profit grew 33.6% y-o-y in 4Q19 and 8.4% in FY19.
  • In FY19, Fu Yu closed its Shanghai plant and recognised a total closure related cost of S$5.6m in FY19. Going forward, the current Shanghai customers will be served from its Suzhou plant.
  • Fu Yu also declared a final DPS of 1.0 S cts. We lift our FY20-21F EPS forecasts by 34.8-37.1% due to higher GPM assumptions.

Singapore plant redevelopment to help improve margin

  • Fu Yu is also embarking on a redevelopment of its premises at 9 Tuas Drive 1. The company will construct a new building encompassing production, warehousing and office space that will be three times the size of its existing building. The new building will be designed to facilitate a seamless workflow across tooling, moulding and assembly operations.
  • Together with the investments in new and advanced production equipment, we expect Fu Yu to benefit from higher productivity and operational efficiency. Capex for this new building is estimated to be S$15.4m and the facility is targeted to be completed in 4Q20.
  • Fu Yu will also dispose a property at 5 Tuas Drive which will help defray the cost of this expansion in Singapore.

Reiterate HOLD, higher Target Price driven by improving ROEs

  • Fu Yu offers a 6.40% dividend yield for FY20F. Its balance sheet remains robust with net cash accounting for 47% of its market cap.
  • We keep our HOLD call with a higher Target Price of S$0.26 based on 1.16x (previously 1.0x P/BV) FY20F book value per share as ROE improvement pulls through. The 1.16x multiple is derived from the Gordon Growth method (ROE: 10.5%, COE: 6.4%).
  • If there is third-party interest to acquire Fu Yu and take it private, that would be a bonus for shareholders, and an upside risk to our HOLD call.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
  • Downside risks are the impact of the US-China trade war on economic growth, unfavourable foreign exchange movements, increased competition and the Covid-19 utbreak.

Willam TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.26 UP 0.220