Fu Yu Corp - DBS Research 2020-08-17: Managing The Weaker Outlook


Fu Yu Corp - Managing The Weaker Outlook

  • Fu Yu's 1H20 revenue declined 26.0% y-o-y while core earnings fell 4.9%.
  • S$2.1m FX gain lifted PATMI to S$7.4m (+46% y-o-y).
  • Higher gross profit margins on better cost management.

Fu Yu's 1H20 Results Review - in line

  • Fu Yu (SGX:F13)'s core earnings (PATMI excluding FX) decreased 4.9% y-o-y to S$5.2m (from S$5.5m in 1H19) mainly due to lower sales. PATMI increased 46.3% y-o-y to S$7.4m (from S$5.0m in 1H19) due to the receipt of government grants (S$1.3m) and a foreign exchange gain of S$2.1m (vs a loss of S$0.5m in 1H19).
  • Revenue declined 26.0% y-o-y to S$71.6m (from S$96.7m in 1H19) as the COVID-19 pandemic disrupted businesses and weakened demand.
    • Revenue from Singapore declined 10.5% y-o-y to S$21.4m (from S$23.9m in 1H19) mainly due to lower revenue from Printing & Imaging and Medical. Sales from Automotive was also impacted by the temporary shutdown of factories in the automotive industry and slower end-user demand.
    • Revenue from Malaysia declined 23.5% y-o-y to S$16.6m (from S$21.7m in 1H19) mainly due to the Consumer segment registering exceptionally high sales in 1H19, as well as the Movement Control Order (MCO) in Malaysia impacting some customers’ operations. The MCO also slowed Power Tools’ sales.
    • Revenue from China declined 34.4% y-o-y to S$33.6m (from S$51.2m in 1H19) mainly due to lower sales in Printing & Imaging, Networking & Communications, and Consumer. The slowdown in demand was due to the Chinese government temporarily stopping manufacturing activities in China in 1Q20, as well as weaker global economic conditions.
  • Gross profit margin improved 2.9ppts to 21.4% (from 18.5% in 1H19) due to a more favourable product mix, lower headcount, and ongoing initiatives to sustain cost and operational efficiencies.
  • Fu Yu's interim dividend maintained at 0.35Scts per share which translates to a payout ratio of c.35.7% in 1H20. The final dividend payment will be subject to the group’s assessment of the business conditions, working capital requirements and capital expenditure estimates.

Closure of Chongqing factory beneficial to operating margins

Chongqing factory to close in 4Q20; consolidation and optimisation of operations.

  • On 7 August, Fu Yu announced that it will be closing its Chongqing factory in 4Q20, in line with its ongoing strategy of streamlining and optimising its operations. As production volume at the Chongqing factory declined, the group believes it will be more beneficial to consolidate its operations in China. It plans to transfer some of the production equipment to other factories in China and sell the remaining.

Chongqing factory is one of the smaller factories in China; minimal impact on financials.

  • The Chongqing factory is a leased factory that has a factory area of 12,600sqm, which is about a third and a quarter the size of its Dongguan and Suzhou factories respectively. In FY19, the Chongqing factory contributed less than 10% and 1% to the group’s revenue and PBT respectively.
  • Fu Yu continues to streamline its business to improve margins. In the past three years, Fu Yu has made several efforts to improve its operating efficiency. As a result, its net profit margins had risen from 2.3% in FY17 to 6.5% in FY19.

Updates on 9 Tuas Drive 1 (Singapore)

Redevelopment of 9 Tuas Drive 1 has resumed.

  • Fu Yu has resumed its redevelopment project at 9 Tuas Drive 1 following the temporary pause due to the Circuit Breaker measures. The redevelopment of its premises at 9 Tuas Drive originally scheduled to complete in 4Q20; however, with the delay, we believe the completion should be in FY21F, subject to no further delays.

Extension of its deadline to assign its premise at 5 Tuas Drive 1.

  • The group has obtained the approval to extend the deadline for the assignment of its premises at 5 Tuas Drive 1 by another two years to 10 September 2022, from 10 September 2020.

Proactive management amid the challenging business outlook

  • Manufacturing PMIs bounce back but outlook remains challenging. Despite manufacturing PMIs rebounding from the plunge during the lockdown (indicating confidence on a m-o-m basis), it has yet to recover to pre-COVID-19 levels. Manufacturing demand remains challenging with many companies facing limitations on their production capacity due to social distancing measures. As certain sectors (construction, hospitality, tourism, and F&B) remain hard hit, weak GDP growth may stifle manufacturing demand.
  • Government relief measures have supported businesses, but it is unclear how long it can last. In our view, the uncertainty of the duration of the pandemic continues to be a headwind to the global economies and manufacturing activities.
  • Consolidation of operations in China, a reduction in staff headcount to buffer operating margins. In the face of the pandemic and weakening demand, Fu Yu has stepped up its efforts to maintain or even improve operating margins. Its operating margins in China is at single digits and its targeted efforts to consolidate its business operations in that region will lift overall margins.
  • Redevelopment of 9 Tuas Drive 1 to improve operating margins from FY21F. The layout of the new building will incorporate a seamless workflow across tooling, moulding, and assembly operations, to enhance productivity and efficiencies, and ensure faster time-to-market for its customers.

Fu Yu - Earnings and Recommendation

Maintain HOLD with a higher Target Price of S$0.27 on the back of higher gross profit margins.

  • We have lowered our Fu Yu's FY20F revenue slightly by 6% to account for the weaker than anticipated revenue in 1H20. However, we are raising our FY20F/21F gross profit margins from 18.9%/20.1% to 21.2%/23.1% on the back of proactive measures taken to manage costs.
  • Given the two-year extension of the deadline to assign its premises at 5 Tuas Drive 1, we are now recognising the estimated sales proceeds of S$7m (net of costs) in FY21F from FY20F previously. As a result, we have revised FY20F/21F earnings by -16%/63%.
  • Our Fu Yu's target price of S$0.27 is pegged to 12.6x its 12-month forward PE, which is its 4-year average.
  • We think that final dividend could be maintained at 1.0Scts per share, bringing FY20F full year dividend to 1.35Scts per share (vs 1.60Scts per share in FY19). In our view, given management’s prudence in its use of cash (zero debt and high levels of cash) and the weakened outlook, we believe that management may maintain its final dividend at 1.0Scts per share, to conserve cash, translating to dividend payout ratio of c.76%, vs 95% in FY19, and yield of 5.6%.

M&A: More attractive at the current price level

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-08-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.27 UP 0.210