Fu Yu Corp - DBS Research 2020-05-13: Shaken At The Core


Fu Yu Corp - Shaken At The Core

  • Fu Yu (SGX:F13)'s 1Q20 revenue down 25.5% y-o-y; core earnings dived 44% y-o-y.
  • S$3.2m FX gain lifted PATMI to S$4.4m (+177% y-o-y).
  • Continue to expect FY20F to be weak; core earnings could bottom in 1H20.
  • Maintain HOLD and Target Price of S$0.21.

Plunge in 1Q20 core earnings

Fu Yu's 1Q20 revenue: S$34.8m (-25.5% y-o-y).

  • Decline in sales was mainly due to weaker demand as well as a temporary halt in manufacturing activities in its operating regions.
  • Singapore: S$10.7m (-10.1% y-o-y). Lower revenue was mainly attributable to lower orders for Medical and Printing & Imaging segment. Sales in the Automotive segment was also affected.
  • Malaysia: S$9.1m (-17.3% y-o-y). Lower sales from the consumer segment which had a high base in 1Q19. Sales in its Power Tools segment was also affected.
  • China: S$15.0m (-37.0% y-o-y). Lower revenue was mainly due to weaker sales in its Networking & Communications, Consumer, and Printing & Imaging segments.
  • Fu Yu (SGX:F13)'s 1Q20 gross profit margin improves to 19.8% from 17.7% in 1Q19. The improvement in gross profit margin was attributable to a change in product mix and ongoing efforts to enhance operational efficiency. However, on a q-o-q basis, the margin declined compared to 25.6% in 4Q19. Gross profit fell 16.9% to S$6.9m on lower revenue.

Fu Yu's 1Q20 core earnings (PATMI excluding FX) plunged 44% y-o-y to S$1.2m.

  • As Fu Yu is in net USD assets position, it benefited from the appreciation of the USDSGD and USDMYR and recorded a FX gain of S$3.2m (vs. -S$0.6m in 1Q19). Including FX, PATMI rose 177% to S$4.4m. While overall earnings were in line with our expectations, core earnings were below.

Our Thoughts: Continue to expect FY2020F to be weak

We are not expecting core earnings to return to pre-COVID-19 levels in FY20/21F.

  • The plunge in core earnings in 1Q20 reaffirms our view that FY2020F will be weak. The dimmed economic outlook and large jobs cuts are likely to weigh on manufacturing demand and thus, we are not expecting core pre-COVID-19 levels in FY2021.

Continuing to expect gross profit margins to weaken in FY20F amid lower utilisation levels.

  • While gross profit margins increased on a y-o-y basis, it declined compared to 4Q19. We believe that this was largely attributable to lower utilisation levels and less economies of scale, which we expect to have an impact on FY20F’s gross margins.

Bright spot: core earnings could bottom in 1H20.

  • The situation is still in a state of flux and there is still a lot of uncertainty surrounding the impact of the COVID-19 pandemic. However, at this current juncture, we believe that core earnings could potentially bottom in 1H20 as governments in its operating regions lift their lockdown/partial lockdown measures to allow manufacturing activities to resume.

Earnings and Recommendation

  • Maintain HOLD and Target Price of S$0.21. No change in earnings and Target Price of S$0.21, pegged to its 12-month average 4-year PE of 13.6x.

M&A: More attractive at the current price level

Attractive traits:

  • Fu Yu is currently trading at 2.9x trailing 12- month EV/EBITDA.
  • Cash represents 53.4% of its market capitalisation.
  • Zero debt.
  • Strong operating cash flows of c.S$20m.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-13
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.210 SAME 0.210