Fu Yu Corp - RHB Invest 2020-03-16: Opportunity To Accumulate; Keep BUY


Fu Yu Corp - Opportunity To Accumulate; Keep BUY

  • Keep BUY and SGD0.32 Target Price, 60% upside, 8.5% yield.
  • As the majority of Fu Yu (SGX:F13)’s production capacity is in Malaysia and Singapore, the COVID- 19 pandemic should be a boon for it. Also, China is slowly recovering from the outbreak, and factories are resuming operations and ramping up production.
  • Margins should remain sustainable, and the recent correction allows investors to buy this net cash company at a more attractive FY20F yield.

Redevelopment of the Tuas factory.

  • The redevelopment project entails the demolition of the existing building and construction of a larger facility to house a factory, warehouse, and office space. The new building will have an estimated GFA of 9,000 sq m, which is more than 3x the size of the existing building.
  • Management also plans to invest in new manufacturing equipment to expand its production capacity, as well as enhance capabilities to produce higher-precision and better-quality products. The layout of the new building will also be modified to facilitate seamless workflows 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, and funded internally. The facility is 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 Fu Yu’s 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 become profitable quicker despite having to incur a SGD5.5m one-off expense in FY19. As such, we remain confident of the group’s outlook and believe this closure will be beneficial to Fu Yu in the longer term.

Still a Top Pick – a stable and resilient stock.

  • With further new projects in the medical & consumer and automotive fronts, we expect such positive growth momentum to continue. With Fu Yu’s Shanghai factory closure, as well as the redevelopment of its Singapore facility, we expect margins to continue improving.
  • With a strong net cash balance sheet in hand, Fu Yu should be able to weather challenges and still reward investors with attractive dividends. As such, we maintain our call with an unchanged 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 to our call: Economic slowdown and worsening trade war.

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.320 SAME 0.320