SINGAPORE (Feb 28): CGS-CIMB Research continues to rate Fu Yu Corp “hold” with a target price of 20 cents.

This came on the back of the group announcing that its 4Q19 earnings increased by 21.7% y-o-y to $2.9 million, despite an 8.8% drop in revenue to $48.1 million.

Meanwhile, FY18 earnings more than doubled to $11.9 million, with revenue sporting a slight increase of 1.4% y-oy- to $197.7 million.

Fu Yu’s board has also proposed a final dividend of 1.0 cents per share.

The group’s FY18 net profit came in above estimates, while revenue was in line.

In terms of sales mix, the group is making progress in growing revenue from better margin products in the consumer, medical and automotive segments.

In a Wednesday report, analyst William Tng says that the group’s balance sheet remains strong with a net cash of $84 million as at end-Dec 2018. Capex requirements are also likely to remain low, allowing the group to the analyst’s dividend expectations. But sizeable mergers and acquisitions may pose a risk to the dividend forecast.

Another key risk to the group’s growth is the impact of the US-China trade war on economic growth, as the group has so far reported no negative impact from the trade tensions in FY18.

According to Tng, current key concerns include intensifying industry competition, pressure on selling prices and foreign exchange risk.

“We raise our FY19-20F EPS forecasts as we assume a higher 17.8% GPM (previously 17.0%). We deem this to be generous as we believe that a sustainable gross profit margin range is likely 15.0-18.0%. We think investors should hold Fu Yu for its 7.6% dividend yield,” says Tng.

“Fu Yu is able to grow revenue and maintain its gross margin, we can expect further ROE improvements to drive its share price re-rating. Any third-party interest in acquiring and privatising Fu Yu would be a bonus for shareholders,” adds Tng.

As at 1.05pm, shares in Fu Yu are trading 4.65% lower at 20 cents, meeting the research house’s target price. The stock is also trading at a FY19 price-to-book ratio of 0.96.