Fu Yu Corp - RHB Invest 2020-11-16: Profit Margins Continue To Improve; BUY


Fu Yu Corp - Profit Margins Continue To Improve; BUY

  • As at 9M20, Fu Yu had S$97.8m net cash with zero borrowings, despite COVID-19 affecting production. With further streamlining of its operations in China, despite lower revenue due to the closing of its Chongqing factory, we expect further cost savings ahead.
  • Fu Yu's 9M20 GPM also expanded to 23.5% from 18.0% in 9M19. We expect the company to tide through the pandemic with attractive yields. Maintain BUY and DCF-based target price of S$0.30, 20% upside and c.7% yield.

Fu Yu's 9M20 PATMI surged 36.7% y-o-y

  • Fu Yu (SGX:F13)'s 9M20 PATMI surged 36.7% y-o-y despite a 23.4% drop in revenue, mainly due the higher GPM. This can be attributed mainly to the change in revenue mix, a reduction in headcount, as well as the group’s ongoing initiatives to sustain costs and raise operational efficiencies.
  • Fu Yu's GPM continued to improve to 23.5% from 18.0% a year ago. With challenging business conditions expected ahead, management will continue to evaluate avenues to further rightsize and optimise its manufacturing operations in China to ensure it is better positioned for long-term business sustainability, ie by closing its Chongqing factory, which will likely provide further cost savings operationally.

Strong net cash; Attractive yield.

  • As at 1H20, Fu Yu had a strong net cash position of S$97.8m and zero borrowings. It has also maintained an interim dividend payout. We expect a 1.7 cents dividend payout for FY20F, which should result in an attractive yield of 6.5%.
  • With management learning from past mistakes during the manufacturing crisis, its prudent approach has led to the company having a net cash balance sheet representing close to 53% of its market cap.
  • Coupled with its rich cash flow generation, we believe that Fu Yu will be able to weather this storm, and come out stronger than its competitors.

Still one of our Top Picks; Stable and resilient.

  • With further new projects in the medical and consumer and automotive fronts, we expect positive growth momentum for 4Q20F. Despite a blip in FY20F caused by the pandemic, we believe that Fu Yu – with its strong net cash balance sheet – will able to weather the storm, and at the same time, reward investors with attractive dividends going forward, despite a temporary drop in FY20F profits. As a result, we maintain BUY on Fu Yu and our DCF-based S$0.30 target price.
  • Fu Yu is also an attractive target for privatisation or acquisition.
  • See Fu Yu Share PriceFu Yu Target PriceFu Yu Analyst ReportsFu Yu Dividend HistoryFu Yu AnnouncementsFu Yu Latest News
  • Key risks to our call: Economic slowdown, worsening trade war, and increasing COVID-19 cases.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2020-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.300 SAME 0.300