Fu Yu Corp - UOB Kay Hian 2020-05-15: 1Q20 Below Expectations; Weighed Down By Softening Demand

FU YU CORPORATION LTD (SGX:F13)

Fu Yu Corp - 1Q20 Below Expectations; Weighed Down By Softening Demand

Fu Yu's 1Q20 core earnings were weaker than expected, forming only 6.4% of our full-year estimate.
Fu Yu was impacted by the COVID-19 outbreak with core net profit declining 44% y-o-y. The 25.5% decline in revenue was attributed to weaker demand across all markets, in part due to temporary closures of its factories in China and Malaysia.
We lower our 2020-22 net profit forecasts by 9.5-20.5% to factor in the near-term challenges from softening demand.

Fu Yu (SGX:F13)’s 1Q20 core net profitI (excludes forex gains of S$3.2m) came in at S$1.2m (-44% y-o-y). This formed only 6.4% of our full-year forecast and was weaker than expected, despite the seasonally weaker quarter. The core earnings decline was mainly due to the 25.5% y-o-y fall in revenue to S$34.8m. Similarly, net margin fell to by 1.2ppt to 3.4% (1Q19: 4.6%)

Fu Yu's revenue from its Singapore segment fell by 10.1% y-o-y, attributed mainly to lower orders for medical and printing & imaging products. Additionally, sales of automotive products in 1Q20 were also affected by slower demand, mirroring the shutdown of automotive factories amid the COVID-19 situation.
Revenue from Malaysia also experienced a decline in 1Q20 (-17.3% y-o-y) on the back of lower sales from the consumer segment due to the high base in 1Q19. Additionally, with the MCO that was implemented in the country in the second half of March, the suspension of operations for some customers affected sales of power tools.
Fu Yu's China market recorded the steepest decline of 37% y-o-y, attributed to lower sales across most products. This was in part due to some of the networking and communication products orders having been brought forward and fulfilled earlier during 4Q19 as the group gradually shifted business activities of its Shanghai factory to its Suzhou factory. Furthermore, the temporary closure of manufacturing activities on orders by the government, coupled with weaker onsumer, and printing & imaging products in China.

Gross margin in 1Q20 increased to 19.8% from 17.7% in 1Q19. This was attributed mainly to a change in revenue mix and ongoing initiatives to sustain cost and operational efficiencies, including the shift of its Shanghai factory.

Fu Yu resumed its manufacturing operations in China after mid-Feb 20 and has also received the approval from the authorities to continue its operations in Singapore during the circuit breaker period.
As for its operations in Malaysia, Fu Yu’s factories in Johor and Penang have been able to continue with limited manufacturing activities since the start of the MCO for certain customers that are exempted from the shutdown. With the conditional MCO announced by the government in Malaysia, the group has resumed normal operations at its factories in Johor and Penang since early-May 20, and will gradually increase its capacity in tandem with customer demand.

Against the backdrop of the MCO in Malaysia which lasted through Apr 20 and the tightened measures in Singapore coupled with potentially softening end-user demand due to the weaker economic outlook, the group is likely to experience a slow down in business orders. As such, Fu Yu expects its revenue to soften in 2Q20 from 2Q19.
That said, we highlight that Fu Yu is cautiously optimistic about remaining profitable at the operational level in 2Q20.

We lower our 2021-22 net profit forecasts by 9.5% and 20.5% as we lower our revenue forecasts due to softening customer demand. We now expect net profits of S$14.9m (- 20.5%), S$16.9m (-11.4%), S$17.8m (-9.5%) for 2020-22 respectively.
We assume a gradual recovery in 2H20 and net profit to decline 19% y-o-y for 2020 and rebound by 14% in 2021.

Maintain BUY with a lower target price of S$0.25 (previously: S$0.30), pegged to peers’ average of 12.4x 2020F PE. Our target price implies a dividend yield of 7.3%.
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John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-15

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