Fu Yu Corp - DBS Research 2020-04-01: Manufacturing Catches COVID-19

FU YU CORPORATION LTD (SGX:F13)

Fu Yu Corp - Manufacturing Catches COVID-19

Shutdown of Malaysia factories; Singapore factories’ production capacity not impacted. Fu Yu announced that its factories in Malaysia will be temporarily shut down to comply with the MCO issued by the Malaysian government. Its factories in Malaysia primarily serve local customers which accounted for c.22% of its FY2019 revenue.
Fu Yu has a ready workforce in the event the shutdown is lifted and has made arrangements for its Malaysian employees working in Singapore. It does not foresee the MCO to have a significant impact on the production capacity of its factories in Singapore.

We are anticipating higher revenue in the medical segment. The medical industry is facing a stress test as the number of COVID-19 cases increase globally. Italy and Spain have reached the limit on their medical resources and are forced to triage their patients.
Fu Yu manufactures plastic parts for its medical customers and we could see an uplift in products from this segment. Its medical business accounted for 16% of its FY18 revenue (latest available) and we are anticipating a 15% y-o-y growth in FY20F. This is higher than the initially projected growth rate for the plastic injection moulding (medical equipment) segment of c.7% over the next five years.

As businesses are unable to function normally and the unemployment rises, we could see a weakened demand across all other business segments (Printing & Imaging, Networking & Communications, Consumer, and Automotive & Power Tools) as companies and consumers cut back on spending.
On a Group basis, we are expecting this decline to outweigh the growth in its medical business. FY20F sales are projected to decline 19% y-o-y.

Downgrade to HOLD with a lower Target Price of S$0.21 on the back of lower FY20F/ 21F revenue, gross profit margins, and PE peg.
The rapid spread of the COVID-19 has weighed on economic activity and affected supply chains. The dampened economic outlook is likely to weigh on end-consumer demand in FY20F, which will affect manufacturing activity at Fu Yu. At this current juncture, we are not expecting the pandemic to last till next year and are expecting a slightly recovery in FY21F.
Key revised assumptions:
- Lowered revenue estimates – We are cutting our FY2020F revenue estimates to S$157m (previously S$175m) on the back of a weaker global economy.
- Lowered gross profit margins – Reducing FY20F’s gross profit margins to 18.8% (Previous: 22.3%) due to lower utilisation levels from the reduced demand and shutdown of factories in China and Malaysia.
- Lowered 12-month forward PE multiple peg – We have lowered our 12-month forward PE multiple from 16.4x (+1SD) to 13.7x (4-year average) on a disruption in earnings growth momentum and negative economic sentiment.
Overall impact on FY20F/ 21F earnings is a 25%/28% cut to previous estimates. We are downgrading our call to HOLD (previously BUY) and lowering our Target Price to S$0.21 (previously S$0.35). Our Target Price is pegged to the average 12-month forward PE of 13.7x.
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With Fu Yu's share price falling c.30% from its high of S$0.285 in January to S$0.20, Fu Yu has become a more attractive M&A target.
Attractive traits:
- It is currently trading at 2.5x trailing 12-month EV/EBITDA,
- Its cash represents 57% of its market capitalisation,
- Zero debt,
- Strong operating cash flows of c.S$20m.