UOB initiates Fu Yu Corp at 'buy' on high and sustainable dividend yield

UOB initiates Fu Yu Corp at 'buy' on high and sustainable dividend yield

By: 
Samantha Chiew
27/11/18, 11:45 am

SINGAPORE (Nov 27): Fu Yu Corp recorded 3Q18 earnings of $4.40 million, almost quadruple that of $1.15 million in 3Q17.

This came on the back of a 4.4% y-o-y increase in revenue to $52.4 million, which brought gross profit for the quarter to $10.6 million.

Other income saw a 31.1% y-o-y increase to $2.27 million, while other operating income was $0.45 million, compared to other operating expenses of $0.85 million last year.

The group declared a second interim dividend of 0.3 cents per share, bringing total dividend payment YTD to 0.6 cents per share. This translates into a dividend payout of about 50.4% based on 9M18 earnings of $9.26 million.

Following this announcement, UOB Kay Hian is initiating coverage on Fu Yu Corp with a “buy” call and a target price of 27 cents, as the stock has a high and sustainable dividend yield.

The group offers a high dividend yield of 8.5% for 2018 and in a Tuesday report, analyst John Cheong expects this to increase to 9.0% in 2019, from improving net profit, FCF and strong net cash position of $75 million or 10 cents per share.

The group in 2Q18 raised its interim dividend for the first time in three years, and Cheong expects further increases.

Previously, Fu Yu relied heavily on customers in the printing industry. But the group is now diversifying to a more stable business model and has reduced the revenue concentration in its printing segment to 31% in FY17 from 50% in FY11.

Leveraging on its capabilities, it has diversified to a more stable customer base (products with longer life cycles), such as home consumer products, medical products, and automotive parts.

In an effort to optimise its business, Fu Yu has taken four key steps: FY earnings contribution and savings from regulatory compliance costs are expected to be about $1.0 million; terminating a loss-making JV of $0.7 million; turning around two loss-making plants in China; and amalgamating two subsidiaries in Singapore in 1Q17 has helped to drive economics of scale and deliver cost synergies of about $1.0 million.

Furthermore, the analyst believes that the group could be a takeover target given its attractive valuations; geographically diversified plant and customers are highly sought after; low utilisation rate of about 50% could appeal to potential acquirers who are in a hurry to increase production capacity; and low-hanging fruit from the savings of three co-founders’ remuneration, which is estimated to be up to $3 million per annum or up to 28% of 2018F net profit.

As at 11.45am, shares in Fu Yu Corp are trading at 19 cents or 0.9 times FY18 book with a dividend yield of 9.0%.

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