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Fu Yu Corp remains one of RHB’s ‘top picks’ while DBS expects challenging year ahead

Lim Hui Jie
Lim Hui Jie • 4 min read
Fu Yu Corp remains one of RHB’s ‘top picks’ while DBS expects challenging year ahead
DBS maintains "hold" on Fu Yu Corp due to challenging year ahead, while CGS-CIMB is more optimistic with a "buy" rating.
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Fu Yu Corporation reported a 46.3% y-o-y increase in its earnings to $7.4 million for the 1H20 ended June on August 14, mainly driven by higher other income and foreign exchange gain.

Group revenue for the half-year period declined 26% y-o-y to $71.6 million due to decreased sales from the group’s manufacturing operations in Singapore, Malaysia and China.

The slowdown in sales was attributed mainly to business disruptions as a result of the Covid-19-induced government measures, as well as weaker end-user demand due to a downturn in the global economy.

1H20 gross profit fell 14.6% y-o-y to $15.3 million, although the group recorded a higher gross profit margin of 21.4% in 1H20 compared to the 18.5% logged in 1H19.

The performance was attributed mainly to the change in the group’s revenue mix, a reduction in headcount and its ongoing initiatives to sustain cost and operational efficiencies.

Other operating income for 1H20 stood at $2.0 million due mainly to a foreign exchange gain of $2.1 million, in contrast to the $473,000 loss the year before. The gain has resulted in a positive change of around $2.6 million between 1H20 and 1H19.

On the back of that, DBS Group Research has maintained its “hold” call on Fu Yu Corporation with a higher target price of 27 cents from 21 cents previously.

“Our target price of $0.27 is pegged to 12.6x its 12-month forward earnings, which is its historical 4-year average,” write analyst Ling Lee Keng in a report dated August 17.

Ling Lee Keng and DBS’s Singapore Research team say they continue to expect FY20/21 to be challenging on the back of a weaker economic outlook.

Despite Fu Yu Corp’s core earnings (profit after tax and minority interests or PATMI, sans the forex gain of $2.1 million) declining by 4.9% y-o-y, the figures came in line with the analysts’ expectations.

The decrease in the group’s core earnings were mainly dragged by lower revenue, which fell 26% y-o-y to $71.6 million.

Sales from the group’s China operations saw the largest decline of 34.4% y-o-y to $33.6 million, largely due to the shutdown of operations and weakened manufacturing demand.

Ling and the team also note that a bright spot could be that core earnings could potentially improve from here on after bottoming out in 1H20. They pointed out Fu Yu’s balance sheet remains strong, with a net cash of $101.6 million and FY20F dividend yield of about 5.6% is attractive.

During the half-year period, Fu Yu Corp also received government grants of $1.3 million during this period, which supported its earnings.

The analysts from DBS said they are “more positive on its gross profit margins from cost-efficiency initiatives”, and that they also expect “imputed increased gross profit margins due to better cost management.”

RHB analysts Jarick Seet and Lee Cai Ling have taken on a more optimistic view on the company, with a “buy” rating and an increased target price of 30 cents from 28 cents previously.

Seet and Lee emphasised their positive view on the group by saying it remains one of its sector’s “top picks” due to its “stable and resilient” balance sheet.

“With further new projects in the medical, consumer and automotive fronts, we expect positive growth momentum for 2H20F,” they write in a report also dated August 17.

Seet and Lee have also cited other reasons behind their recommendation such as Fu Yu Corp’s strong cash position, further cost savings, and the group’s management learning from its past mistakes during the manufacturing crisis.

Coupled with a rich cash flow generation, they believe that Fu Yu will be able to weather this storm and likely come out stronger than its competitors.

They also noted despite a blip in FY20F caused by COVID-19, they believe Fu Yu, with a strong net cash balance sheet, will be able to weather the storm and, at the same time, still be able to reward its investors with an attractive dividend despite a temporary drop in profits for FY20.

For 1H20, Fu Yu Corp has maintained its interim dividend payout. Seet and Lee have therefore estimated a distribution per share (DPS) of 1.7 cents for FY20F, which “will result in an attractive yield of 6.7%”.

As at 2.16pm, shares of Fu Yu were trading at 24 cents, with an FY20 price to book ratio of 1.1 and dividend yield of 6.7%, according to CGS-CIMB’s estimates.

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