SINGAPORE (Dec 2): UOB Kay Hian is keeping its “buy” recommendation on Fu Yu Corporation with a slightly higher target price, despite the precision plastic components manufacturer reporting a 11.1% drop in its 3QFY2019 earnings.

Fu Yu saw its earnings fall to $3.9 million during the latest quarter, from $4.4 million a year ago.

3QFY2019 revenue slipped 2.2% to $51.3 million, even as operations in Singapore, Malaysia and China registered relatively stable sales.

Gross profit dived 17.8% to $8.7 million in 3QFY2019, as cost of sales rose 1.7% to $42.6 million despite the lower revenue. Gross profit margin fell 3.2 percentage points to 17.0% in 3QFY2019.

Fu Yu says the decline was mainly due to the recognition of one-time expenses in relation to the closure of the group’s subsidiary in Shanghai, which will cease manufacturing operations by the end of 2019.

Excluding these one-time expenses of around $4.0 million which was recognised in the cost of sales, the group would have registered a higher gross profit margin.

“Management has actively taken steps to achieve cost efficiencies, including its strategic decision to shift operations in Shanghai to its Suzhou factory which should help lower overheads and improve utilisation,” says analyst John Cheong in a Nov 29 report. “Excluding one-off expense from the shift, 3Q19 results were good.”

Cheong notes the excluding the one-off, gross margin would have expanded by 4.6 percentage points y-o-y.

The brokerage is raising its FY2019-FY2021 net profit forecasts by 8.8-9.4% on the back of higher margin assumptions. As such, it is raising its target price to 29.5 cents, from 28.5 cents previously, representing a potential upside of 25.6%.

Among other things, Cheong favours Fu Yu for its attractive dividend yield.

The group declared a second interim dividend of 0.25 cents per share in 3QFY2019, bringing total dividends for 9MFY2019 to 0.60 cents, representing a dividend payout of 50.4%.

“We estimate full-year dividend of 1.7 cents, translating into an attractive yield of 7.2%,” Cheong says.

The analyst also sees Fu Yu as a potential takeover target, on the back of its attractive valuation at 3.2 times 2020F EV/EBITDA. “Note that its peers have been privatised at EV/EBITDA of 5.0-25.7 times in the past,” Cheong says.

As at 12.20pm, shares in Fu Yu are trading flat at 23.5 cents.