Fu Yu Corp - UOB Kay Hian 2020-08-18: 1H20 Results In Line; Anticipate A Seasonally Stronger 2H20


Fu Yu Corp - 1H20 Results In Line; Anticipate A Seasonally Stronger 2H20

  • Fu Yu's 1H20 core earnings came in at S$5.2m (-4.9% y-o-y), forming 35% of our 2020 estimate which we deem in line as we anticipate a stronger 2H20. Despite the 26% y-o-y decline in revenue in 1H20, earnings declined to a smaller extent thanks to gross profit margin expansion on the back of a favourable revenue mix and cost efficiencies.
  • At Fu Yu's share price, its net cash position forms 55% of its market cap and offers an attractive dividend yield of 6.5%.
  • Maintain BUY on Fu Yu with a 16% higher target price of S$0.29.

Fu Yu's 1H20 Results

1H20 results in line with expectations.

  • Fu Yu (SGX:F13)’s 1H20 core PATMI (excludes forex gain of S$2.1m) came in at S$5.2m (-4.9% y-o-y), forming 35% of our full-year forecast. This implies 2Q20 core net profit of S$4.0m (+20.4% y-o-y), a strong q-o-q recovery from core earnings of S$1.2m in 1Q20. As we anticipate a stronger 2H20, the earnings are in line with our expectations.

Drop in sales due to business disruption and slow end-user demand.

  • As expected, Fu Yu's revenue in 2Q20 fell 26.5% y-o-y due to the impact from COVID 19. Revenue from its Singapore segment declined by 11% y-o-y in 2Q20, attributed mainly to lower orders for medical and printing & imaging products. Additionally, sales of automotive products were also affected by slower demand, mirroring the temporary shutdown of automotive factories amid the COVID-19 situation.
  • Revenue from Malaysia also experienced a drop in 2Q20 (- 30% y-o-y) due to the impact from the country’s implementation of the movement restriction order (MCO) in the second half of March.
  • Its China market recorded the steepest decline of 32% y-o-y in 2Q20, in part due to consolidation of its Shanghai and Suzhou factories which had also led to some orders of the networking & communications segment being fulfilled earlier in 4Q19.

Weakness in sales offset by expansion of margins.

  • The earnings in 2Q20 were largely lifted by the higher gross profit margin of 22.9% in 2Q20, up 3.6ppt from 19.3% in 1Q20. Management noted that this was thanks to the change in the group’s revenue mix, a reduction in headcount and its ongoing initiatives to sustain cost and operational efficiencies.
  • Overall core net profit margin rose to 11.0% (+4.3ppt) in 2Q20 which has helped to lift 1H20 core net margin to 7.3% (+1.6ppt), despite the lower level of revenue.

Strong cash position (55% of market cap) and attractive dividend yield.

  • Fu Yu has declared an interim dividend of 0.35 S cents per share in H120, unchanged from 1H19.
  • Backed by its strong cash flow generation, Fu Yu offers a high and sustainable dividend yield of 6.5% for 2020F. This is based on our DPS expectation of 1.6 S cents for 2020F.
  • We highlight that Fu Yu has a cash position of S$101.6m (zero borrowing) as of 1H20, which represents 55% of its market cap.

Further streamlining of operations in China.

  • To recap, the group consolidated its Shanghai and Suzhou manufacturing operations towards the end of 2019, which has proven to benefit its cost structure and has provided a buffer from the slowdown in business resulting from COVID-19. The group shared that it is looking to further right size and optimise its manufacturing operations in China. As such, Fu Yu announced on 7 Aug 20 that it plans to cease business activities at its factory located in Chongqing, China. The group will instead focus on its operations located at Suzhou, Dongguan and Zhuhai in China.

Fu Yu Corp - Valuation & Recommendation

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-18
SGX Stock Analyst Report BUY MAINTAIN BUY 0.29 UP 0.250