Hit by lower China sales, Fu Yu Corp faces a challenging outlook ahead, says RHB Group Research analyst Jarick Seet.
“We expect margins to likely remain weak for the next few quarters and revenue to stay low. This can be attributed to a shortage of shipping containers and labour, as well as logistics issues,” writes Seet in a Nov 15 note.
Seet is downgrading Fu Yu Corp to “neutral” from “buy”, with a lowered target price of 30 cents from 37 cents previously. The new target price represents a 3.4% upside.
Fu Yu Corp, an investment holding company, manufactures and supplies high-precision injection moulds and plastic parts in Asia. It is engaged in the manufacturing and sub-assembly of precision plastic parts and components; fabrication of precision moulds and dies; and trading and management services. It serves the information technology, telecommunications, automotive, medical, electronic and electrical appliance sectors.
Disruptions in the production of raw materials, which has caused the supply of resins to remain tight, is another issue, notes Seet. “Shipping delays too have impacted Fu Yu’s deliveries to clients. Its China production is also limited by the ongoing electricity rationing in China, where the company typically arranges its production schedules in accordance with notices from the authorities on planned power shutdowns. Note: This has become increasingly difficult to manage, especially in instances when very short notice is given.”
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As of 9M2021, revenue declined 18.1% y-o-y due to the cessation of Fu Yu Chongqing and lower orders. The Singapore segment generated higher sales of 10.1% while Malaysia operations achieved stable sales during this period vs 9M2020.
As a result of a lower revenue base, gross processing margin (GPM) contracted to 22.9% in 3QFY2021 from 3QFY2020’s 27%. A reduction in the amount of grants received under government schemes to support businesses amid the Covid-19 pandemic also impacted profitability, writes Seet.
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With the board keen to enhance Fu Yu Corp’s capital structure and has already declared a higher interim dividend and further special dividend for 1HFY2021, Seet expects total dividend per share (DPS) for FY2021 to be raised to 4.7 cents from 1.6 cents a year ago. “This represents a very attractive yield of 16.5%. We expect management to continue rewarding shareholders with excess cash flow not needed by the business.”
As at 11.02am, shares in Fu Yu are trading flat at 28 cents.