SINGAPORE (Apr 15): UOB KayHian says any potential disposal of properties by Fu Yu Corp to further streamline its operations could unlock the hidden value and reduce operational costs.

Furthermore, the hidden value of Fu Yu’s assets, on top of its cheap valuation, diversified operations and low utilisation rate, make the manufacturer of precision plastic components and moulds an attractive takeover target.

“Maintain “buy” and target price of 28.5 cents,” says analyst John Cheong in a Monday report.

In its 2018 annual report, Fu Yu revealed that the fair value of its leasehold properties amounted to $65.7 million, with carrying amount of $15.6 million.

“This $50 million discrepancy indicates Fu Yu’s book value is undervalued by 7 cents/share or 33% of its market cap,” says Cheong.

To uncover the up-to-date value of Fu Yu’s properties, UOB pegged the value of its land to the latest transaction price.

“As a result, we derived a value of $62.5 million, slightly below the fair value estimated by Fu Yu in its 2018 annual report that amounted to $65.7 million,” says Cheong.

Cheong notes that Fu Yu’s most valuable properties are located in Singapore, followed by Malaysia and China. In addition, all nine of Fu Yu’s properties -- including an investment property in Malaysia -- are being recognised on its balance sheet at cost less accumulated depreciation.

Cheong says the recent takeover offer of PCI -- the electronic components manufacturer -- at attractive premium could lead to re-rating. On Jan 4, PCI announced it had received a takeover offer from Platinum at $1.33 per share, a premium of 60.1% over the volume weighted average price of the shares for the 12-month period up to Sept 17 2018.

“The valuation metrics of 5.5x TTM EV/EBITDA based on the offer price is 83% higher than Fu Yu’s 3.0x 2019F EV/EBITDA,” says Cheong.

For 2019, Fu Yu also offers a dividend yield of 8.5% while net cash forms 53% of its market cap.

As at 4.11pm, Fu Yu shares were trading at 20 cents.