Fu Yu Corp - DBS Research 2020-11-12: The Bottom Is Near; Upgrade To BUY


Fu Yu Corp - The Bottom Is Near; Upgrade To BUY

  • Fu Yu's 9M20 operating profit was above expectations, increasing 32.1% y-o-y.
  • Fu Yu's 9M20 revenue declined 18.5% y-o-y dragged by weaker sales in Malaysia and China.
  • Fu Yu's 9M20 normalised gross profit margins climbed 3.5ppts on better revenue mix and efficiencies.

Fu Yu's 9M20 results above our expectations; pass the worse

  • Fu Yu (SGX:F13)'s 9M20 operating profit was above our expectations, increasing 32.1% y-o-y to S$14.4m. See Fu Yu's  announcements. The increase was largely due to a jump in the Group’s profitability as well as the receipt of government grants. Fu Yu’s 9M20 operating profit formed 95.8% of our FY20F operating profit as the increase in its profitability due to its cost containment efforts and improvements in operational efficiencies exceeded our expectations.
  • Fu Yu's 9M20 revenue declined 18.5% y-o-y to S$41.8m due to weaker sales in China and Malaysia. The steeper decline in these two regions was moderated by a slight decline in sales from Singapore.
  • Revenue from Singapore decreased 3.9% y-o-y to S$34.6m as higher sales of consumer segment partly cushioned the decline in sales in its printing & imagine and automotive segments.
  • Revenue from Malaysia decreased 18.8% y-o-y to S$26.3m mainly due to the Movement Control Order (“MCO”) which led to a suspension of operations of some customers. It witnessed higher sales from its medical segment.
  • Revenue from China declined 34.1% y-o-y to S$52.5m due to the temporary closure of manufacturing activities in China in 1Q20 and lower demand amid weakened economic conditions.
  • Fu Yu's 9M20 normalised gross profit margins improved 3.5ppts y-o-y to 24.2% due to better revenue mix and improvements in operations. The Group had reduced its headcount and raised operational efficiencies. We believe it was also a result of the gradual unwinding of its production at its less profitable plant in Chongqing and the cessation of its Shanghai plant also helped to improve margins.

Fu Yu Chongqing will cease production in 4Q20.

  • Fu Yu recognised a one-time expense of S$0.8m in 9M20 in relation to the factory’s closure.
  • 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 Fu Yu’s revenue and PBT respectively.

Fu Yu - Earnings, Thoughts, and Recommendation

  • We are expecting the redevelopment of 9 Tuas Drive 1 to further improve Fu Yu’s operating margins from FY21F as the layout of the new building incorporates a seamless workflow across tooling, moulding, and assembly operations, to enhance productivity and efficiencies, and ensure faster time-to-market for its customers.

Raised Fu Yu's FY20F/21F earnings by 16/12% on the back of higher gross profit margins.

  • The closure of its Chongqing plant, reduced headcount and better revenue mix that led to an expansion of its normalised gross profit margin by 3.5ppts were positive surprises. As a result, we are raising our Fu Yu's FY20F/21F gross profit margin assumptions by 2.6/3.0ppts to 23.1/25.3%.

Upgrade Fu Yu to BUY on higher target price.

  • We believe we are nearing or may have passed the worst for Fu Yu and earnings should bottom out in FY20F. Our target price for Fu Yu is pegged to 11.8x (4-year average) its 12-month forward earnings. Valuation is attractive at -0.9 SD and is at a deep discount to its peer average of 16.9x/13.9x FY20F/21F PE.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
  • Given management’s prudent use of cash (zero debt and high levels of cash) and the weaker FY20F results, we believe that management may maintain Fu Yu's final dividend at 1.0cents per share, translating to a dividend payout ratio of c.66% (vs 95% in FY19) and FY20F yield of 5.7%.

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2020-11-12
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