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SI Research: Fu Yu Corporation – A Good Company In A Tough Market?

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The Singapore Purchasing Managers’ Index (PMI) for January 2019 dipped a further 0.4 points from the previous month to 50.7 amid a general downturn across the Asia region. This was its lowest reading since December 2016 and its fifth consecutive month of decline. Amidst this backdrop, Fu Yu Corporation (Fu Yu) has recently been receiving rather positive recommendations from the street. Why then is Fu Yu still the sole buy pick over a manufacturing slowdown?

Diversifying Into More Stable Businesses

Fu Yu is a manufacturer of high precision plastic parts and moulds with more than 40 years of experience. Founded in 1978, the Group has established a strong presence in Asia with manufacturing facilities located in Singapore, Malaysia and China.

Fu Yu is widely recognised for its capability in printing and imaging products. By leveraging on its extensive operating history, Fu Yu has broadened and diversified its customer base in market segments with greater stability, longer product life cycles and higher growth potential such as eco-friendly home consumer products, medical products and automotive parts.

Since then, Fu Yu has reduced its revenue concentration in traditional industries such as printing and imaging segment from 50 percent in FY11 to 31 percent in FY17.

Exceptional 9M18

In 9M18, revenue increased 5.2 percent to $149.6 million largely contributed by higher sales of the printing & imaging, consumer and automotive products in Singapore as well as increased sales of consumer and medical products in Malaysia. These helped to mitigate the weaker sales of networking & communications products in China. Nevertheless, China remained as the Group’s largest geographical segment with a contribution of 56.9 percent in 9M18.

Gross profit jumped 14.5 percent to $26.6 million as gross profit margin expanded from 16.3 percent to 17.8 percent due to a favourable product sales mix as well as continual efforts on raising cost and operational efficiencies. Meanwhile, the Group recorded a foreign exchange gain of $1.1 million as opposed to losses of $3.1 million as a result of appreciation of USD against SGD and MYR.

As a result, net profit in 9M18 soared 333.2 percent from $2.1 million to $9 million.

Going forward, with the management’s continual efforts in balancing the portfolio with higher profit margin products, we could expect the continued revenue and margins expansion from new projects in the automotive, consumer and medical spaces.

On top of that, Fu Yu has been optimising its business by completing the privatisation of its 71 percent-owned Malaysia-listed subsidiary, LCTH in June 2018. Also, management is still actively seeking ways to further optimise the cost structure of its operations in the region, especially in China which includes rightsizing exercises and sale or lease of unutilised factory space. This would further improve the margins.

The 7.6 Percent Dividend Yield

Over the years, Fu Yu has also been able to reduce its debt gradually and in FY15, they have zero debt on their balance sheet, further contributing to its stellar balance sheet performance.

9M18 FY17 FY16 FY15 FY14 FY13 FY12
Total Borrowings ($m) Zero borrowings 1.4 3.3 1.2
Dividend Per Share (cents) 0.6 1.5 1.5 1.5
Dividend Payout 50.4% 254.2% 107.1% 80.2%
EPS (cents) 1.19 0.59 1.40 1.87 1.35 0.91 -0.59

As at 30 September 2018, Fu Yu sustained a sound financial position with a cash balance of $77.3 million and zero borrowings. The net cash position is equivalent to half of its market capitalization as per its closing price of $0.21 on 11 February 2019.  Its massive cash position highlights its prudent balance sheet and financial flexibility to provide a good war chest for expansion and also a reserve in times of need.

Shareholder’s equity stood at $163.6 million, which is equivalent to net asset value of 21.73 cents per share that includes cash and cash equivalents of 10.27 cents per share.

Moreover, Fu Yu saw strong cash generation in 9M18 with operating cash flow coming in at $14.9 million and a 56.4 percent increase in capital expenditure to $5.1 million. Despite that, this translates to a free cash flow of $9.8 million, compared to a negative free cash flow of $0.9 million considering it spent only $3.3 million in capital expenditure in 9M17.

Due to the fact that Fu Yu was not doing well and reported net losses prior to FY13, the Group only started distributing dividends in FY15. Despite a slowdown in its business, Fu Yu has paid $0.015 per share over the past two years. Meanwhile, Fu Yu has also increased interim dividends for 2Q18 and 3Q18 from $0.002 to $0.003. Given its large net cash position and a ballooning free cash flow, we believe Fu Yu will increase its FY18 dividend to $0.016 per share, implying a yield of 7.6 percent. Not only that, we also could expect management to continue rewarding shareholders with higher dividends, in view of improving business and better financial performance.

Valuations

Closing Price

(11 Feb 2019)

TTM P/E TTM Dividend

Per Share

TTM Dividend

Yield

P/B
Fu Yu 0.210 13.92 0.016 7.62% 0.97
Memtech International 0.905 9.03 0.055 6.08% 0.76
Sunningdale Tech 1.520 10.67 0.075 4.93% 0.77

At $0.21 per share, Fu Yu is currently trading at 13.9 times earnings and 0.97 times to book value. However, stripping away net cash of $0.103 per share from its share price, price-earnings ratio (P/E) ex-cash would be only at 6.3 times. With its low valuation right now, along with an attractive yield of 7.6 percent, this makes Fu Yu a relatively cheap stock compared to its listed peers.

That said, Fu Yu has been taking steps to optimise its business and making good progress towards achieving its ambitions. However, investors should only expect to be decently rewarded in the longer term.

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