SINGAPORE (Sept 16): UOB Kay Hian is keeping its “buy” call on Fu Yu Corporation with a target price of 28.5 cents, as the group is putting in efforts to optimise its operations.

In fact, the group has launched three initiatives that will lead to cost savings and growth.

The first initiative is the liquidation of a loss-making joint venture (JV). It started with the voluntary liquidation of its 40%-owned Berry Plastics in Malaysia in July.

In a Sept 16 report, analyst John Cheong says, “We expect the process to completed by end-19 and the earnings drag from this JV should drop from an $0.8 million loss in 2018 to $0.5 million loss in 2019 and to zero in 2020.”

The second initiative is the renewal of lease for the group’s Singapore plant. Fu Yu will be renewing its leases for 7 and 9 Tuas Drive 1 for another 20 years from 2021. It will then sell 5 Tuas Drive 1 by 2020 to comply with the lease renewal term.

The group also has plans to redevelop its plant at 9 Tuas Drive to expand its operations. The estimated capex is $13 million, which could be partially funded by the disposal proceeds from 5 Tuas Drive 1.

The third initiative is the closure of its Shanghai factory. The group in August received an early termination of lease for its Shanghai factory. Hence, it decided to shift operations in Shanghai to Suzhou, which has a larger production capacity and is ideally located to serve its customers in Shanghai.

“The medium-term benefits include lower overheads and better utilisation at its Suzhou factory. We understand that labour cost in Shanghai is 10-20% higher than in Suzhou and the local government in Shanghai does not encourage manufacturing industry to operate in the city due to pollution issue,” says Cheong.

Although the group may incur a one-time expense of $5.5 million for closing down its Shanghai plant and drag its 3Q19 net profit into a loss, share price could be supported by higher dividend of 1.7 cents, which will not be affected by the one-off expense.

As at 2.40pm, shares in Fu Yu are trading 2.17% lower at 22 cents or 1.1 times FY19 book with a dividend yield of 7.4%.