Fu Yu Corp - CGS-CIMB Research 2020-05-13: Expects Weaker 2Q


Fu Yu Corp - Expects Weaker 2Q

  • Fu Yu's 1Q20 revenue formed 20% of our full-year forecast, below the 5-year historical average of 24%.
  • Net profit formed 34% of our full-year forecast (above historical average of 9%). Given the weak 2Q outlook, we leave our forecasts unchanged.
  • Downgrade from Add to HOLD. Dividend yield is 7.3%.

Saved by foreign exchange gain

  • At its 1Q20 business update yesterday, Fu Yu (SGX:F13) announced that revenue fell 26% y-o-y to S$35m due to temporary factory closures in response to the Covid-19 outbreak. See Fu Yu Announcements. Despite the revenue decline, Fu Yu’s continued efforts to skew its revenue mix towards better margin products and cost saving initiatives saw 1Q20 gross profit margin at 19.8% versus 17.7% a year ago.
  • Net profit grew 175% y-o-y to S$4.4m (1Q19: S$1.6m). Excluding the foreign exchange gain of S$3.2m, net profit would have been S$1.2m, down 45% y-o-y.
  • Fu Yu's balance sheet remains in a net cash (zero debt) position of S$94m or S$0.125 per share as at 31 Mar 2020.

2Q20F revenue to fall y-o-y due to Covid-19

  • Although Fu Yu’s factories are now operating normally, activities are still being impacted by travel restrictions, while some of its customers are still being affected by Covid-19- related operational restrictions or are in the process of resuming normal operations. The company also cited softening end-user demand due to the weaker economic outlook.
  • In Fu Yu’s view, 2Q20F is likely to see lower revenue y-o-y, but the company is cautiously optimistic that it may remain profitable at the operating level.
  • As Fu Yu has also temporarily stopped the construction works for its redevelopment project at 9 Tuas Drive1 (due to Singapore’s circuit breaker measures), there may be some effect on Singapore’s production capacity.

Downgrade from Add to HOLD – 7.3% dividend yield

  • Our forecasts remain unchanged for now while our Target Price stays at S$0.21, based on an unchanged Gordon Growth derived P/BV multiple of 0.95x. Given the uncertain earnings outlook, we downgrade our rating on Fu Yu from Add to Hold.
  • Projected FY20F dividend yield is 7.3%.
  • We estimate Fu Yu’s net cash position as at end FY20F to be S$84.9m (zero debt balance sheet). As at 31 Mar, net cash was 57% 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.
  • Upside risk is faster-than-expected recovery from Covid-19 disruptions.
  • Downside risks are unfavourable foreign exchange movements, increased competition and worsening Covid-19 outbreak.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-13
SGX Stock Analyst Report HOLD DOWNGRADE ADD 0.210 SAME 0.210