Fu Yu Corp - CGS-CIMB Research 2020-04-01: Downside Risks Getting Priced In


Fu Yu Corp - Downside Risks Getting Priced In

  • We think economic impact of Covid-19 and production disruptions will impact our FY20-22F forecasts negatively.
  • Our earnings cuts reflect such concerns but we opine that GFC trough valuation is unlikely to be revisited.
  • With earnings risk getting priced in, we upgrade Fu Yu from Hold to ADD.

Covid-19 disrupts operations

  • Fu Yu (SGX:F13) has announced that it will be closing its factories in Johor and Penang from 18 Mar 20 to 31 Mar 20 to adhere to the Movement Control Order (MCO) issued by the Malaysian government. The group will resume operations if customers are able to obtain exemptions.
  • In addition, the group has been able to house half of its Malaysian workforce (affected by the MCO) in Singapore. Fu Yu also updated that its factories in China have already resumed normal operations.
  • Ongoing travel restrictions and disruptions in the supply chain amid the Covid-19 situation may still hinder its customers’ operations in China. Fu Yu expects these temporary closures to have an impact on 1Q20 revenue. The first quarter is also a seasonally slower quarter.

Non-consensus earnings cuts

  • As more countries respond to the Covid-19 outbreak with lockdowns, the global manufacturing supply chain will feel the impact. In addition, the economic outlook has weakened and with that, consumer demand would be reduced in the short-term.
  • We estimate that c.68% of Fu Yu’s revenue is derived from consumer/automobile/printing/communications segments. This in addition to the short-term impact from factory closures leads us to cut FY20F revenue /net profit to 13%/33% below Bloomberg consensus estimates (excluding our forecasts).

GFC trough valuation unlikely to be revisited

  • During the global financial crisis (GFC), Fu Yu hit a trough P/BV of 0.20x in 2009. However, we think the risk that this trough valuation will be revisited is low as then, Fu Yu suffered losses in both FY08 and FY09.
  • Today, Fu Yu is a much leaner company so we are still expecting the company to remain profitable over our FY20-22F forecast period.

Upgrade to ADD as earnings risk gets priced in

  • We think our revenue-driven earnings cuts are being priced in by the market. We lower our Target Price to S$0.21, based on Gordon Growth derived P/BV multiple of 0.95x (previously 1.16x) to reflect the ROE decline as earnings fall in the midst of the Covid-19 outbreak.
  • Projected FY20F dividend yield is 8.1%.
  • We estimate Fu Yu’s net cash position as at end FY20F to be S$93.7m (zero debt balance sheet). As at end 23 Mar, net cash was 69% of Fu Yu’s market cap.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
  • Re-rating catalyst is faster-than-expected recovery from Covid-19 disruptions.
  • Downside risks are unfavourable foreign exchange movements, increased competition and the worsening Covid-19 outbreak.

Willam TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-01
SGX Stock Analyst Report ADD UPGRADE HOLD 0.21 DOWN 0.260