Fu Yu Corp - DBS Research 2021-03-08: Attractive Entry Opportunity At FY21 Ex-Cash P/E Of 5.6x


Fu Yu Corp - Attractive Entry Opportunity At FY21 Ex-Cash P/E Of 5.6x

  • Fu Yu's FY20 core earnings of S$19.4m above our expectations.
  • FY20 normalised gross profit margin expanded by 2.6ppts to 24.5%.
  • Attractive dividend yield of 5.5% with cash balance at ~50% of Fu Yu's market cap.

Fu Yu's FY20 core earnings beat our expectations

  • Fu Yu (SGX:F13)'s FY20 core earnings (net profit excluding FX) of S$19.4m was above our expectations. While FY20 revenue was in line with our expectations, gross profit margin was better-than-expected as we believe operational efficiencies continued to drive margin improvement. In addition, Fu Yu recorded a lower effective tax rate of 13.7% in FY20 (vs 21.7% in FY19) as the Group recognised deferred tax assets in 2H20.
  • Fu Yu's FY20 revenue declined 21.0% y-o-y to S$153.4m; 2H20 revenue fell 15.9% y-o-y to S$81.9m. The decline was attributed mainly to business disruptions as a result of government measures to address the COVID-19 situation, as well as weaker end-user demand.
  • Sales in Singapore increased 3.8% y-o-y to S$48.0m as higher sales of consumer and medical products buffered the impact of a decline in sales of printing & imaging products and automotive products.
  • Sales in Malaysia and China declined 23.5% y-o-y and 34.4% y-o-y to S$16.6m and S$33.6m respectively, as they were more impacted by the slowdown in end-user demand and government measures.

Fu Yu's FY20 gross profit margin improved 4.3ppts y-o-y to 24.0%; 2H20 gross profit margin improved 5.9ppts y-o-y to 26.3%.

  • The improvement in gross profit margin was mainly attributed to changes in revenue mix, reduction in headcount, and ongoing initiatives to control costs and improve operational efficiencies. Excluding one-time expenses related to the closure of its factory operations in Chongqing and Shanghai, Fu Yu would have registered higher gross profit margins of 27.3% in 2H20 and 25.2% in 2H19, or 24.5% in FY20 and 21.9% in FY19.

Fu Yu proposed final dividend per share of S$0.0125 per share.

  • Fu Yu's total dividend per share in FY20 remains unchanged y-o-y at S$0.016 per share. This translates to a dividend payout ratio of 71.1% in FY20 and a dividend yield of 5.5%.

Redevelopment of 9 Tuas Drive delayed to end-2021.

  • Barring any unforeseen circumstances, the completion is expected to be by end-2021. We had initially assumed the completion to be by mid-2021.

Our Thoughts, Earnings, and Recommendation

Given the strong sequential improvement in 2H20, we think the bottom was in 1H20.

  • Fu Yu's 2H20 revenue increased 14.4% h-o-h to S$81.9m and core earnings rebounded 171.4% h-o-h to S$14.2m. This was largely due to disruptions in its operations in Malaysia and China, as well as weaker end-user demand in 1H20. We attribute a large part of the weakness in 1H20 to the shutdown of its operations in Malaysia and China.
  • While the pandemic is still ongoing and uncertainties remain, we believe that the worst is over as companies and governments have learnt to better manage the coronavirus. With the low base effect in FY20 and an improving economic situation, we are projecting y-o-y revenue growth of 7.0% in FY21F.

Expect continued improvement in gross profit margins.

  • Despite the challenging operating environment, Fu Yu has managed to continue to improve its gross profit margins. Gross profit margins reached a record high of 26.3% in 2H20. FY20 normalised gross profit margins increased by 2.6ppts y-o-y to 24.5% in FY20. These were largely driven by efforts to consolidate its production facilities as well as the continued increase in automation.
  • We remain positive on Fu Yu’s proactive efforts to lift gross profit margins.

Pilgrim Partners’ 29.8% acquisition of Fu Yu could have a positive impact on the long-term direction of the business.

  • Given that Pilgrim Partners has acquired such a large stake in Fu Yu, we believe that it is in their best interest to steer the company towards success. There is no immediate change to Fu Yu’s business.
  • The new directors have a wealth of experience in banking and finance, private equity, and business consulting, and will be able to bring fresh perspectives and value to the group. We believe that as consultants and having experience in the finance field, they will be able to leverage on their network and business acumen to drive the company to further improve on their business strategy.

Revise Fu Yu's FY21F/22F earnings forecast by -22%/20%.

  • The change was mainly due to our shift in assumption of the sale of 5 Tuas Drive to FY22F, from FY21F. We had previously estimated sales proceeds to be S$7m (net of fees and taxes). We now expect the sale to take place in FY22F, aligned with the expected completion of 9 Tuas Drive 1, which is by end-2021.

Expecting core earnings of S$20m in FY21F.

  • We revised our FY21F gross profit margins forecast up by 0.5ppts to 25.8%, from 25.3% previously, as gross profit margin expansion in FY20 beat our expectations. Despite government grants of S$2.3m in FY20, we are expecting Fu Yu's core earnings (net profit excluding FX) to increase by 3.2% y-o-y to S$20m in FY21F.

Maintain BUY on Fu Yu with a higher target price of S$0.35 (previously S$0.31).

Attractive entry opportunity – ex-cash P/E of 5.6x with improving core earnings.

  • We believe FY20 was the bottom for Fu Yu’s core earnings as its operations were disrupted in 1H20. With the low base effect in FY20 and an improving economic situation, we are expecting core earnings to increase in FY21F.

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-03-08
SGX Stock Analyst Report BUY MAINTAIN BUY 0.35 UP 0.310