Excerpts from analyst's report

RHB Research analyst: Jarick Seet

Fu Yu Corporation Ltd - Gallery - 6Photo: CompanyWe brought Fuyu, one of the top four jewels in our top 25 small-mid cap book (launched yesterday), to meet fund managers/investors on a non-deal roadshow that lasted a day. We received positive feedback, and management addressed key concerns surrounding its business and dividends.

Going forward, it may likely adopt a more cost-down approach for its factories in China – especially its Dongguan and Suzhou plants.

Management reiterated its stance to have a higher payout ratio than FY15’s 80%. Maintain BUY with a SGD0.29 TP (35% upside). 

Growth from medical, filtration and automotive industries. After three years of declining revenue, Fuyu aims to increase its topline this year. However, it would still be focusing on products that yield higher margins – especially in the medical, filtration and automotive space. Currently, only less than 5% of its revenue comes from the automotive industry.

Higher payout ratio than 80%. Fuyu has implemented a dividend policy of paying out at least half of its PATMI. Last year, it paid out 80% of net profit. Going forward, we think that it is likely to pay out a larger percentage, eg 100% of earnings, due to its strong cash-generative operations that generate about SGD20m-30m a year, as well as its strong net cash position which represents about 70% of its current market capitalisation.

♦ Share buyback programme likely 
JarickSeet11.14"With the excess cash, we think that management is likely to use some of it to implement a share buyback programme, coupled with a pro-shareholder active dividend policy in order to meet the minimum trading price of SGD0.20 as required by SGX."

-- Jarick Seet (photo)

More cost-cutting for China plants. Management highlighted that it has two large-capacity plants in Dongguan and Suzhou that are heavily underutilised and incurring sizeable losses at the moment.

It is now implementing cost-cutting/right-sizing measures on these plants – much like what it did to turn around its Malaysian operations earlier.

Without these losses dragging down the group’s earnings, we expect lower depreciation expenses as well as higher margins and profits just from this cost-cutting exercise alone.

Key risks are a depreciation of the value of the USD and an economic recession.

Maintain conviction BUY with a DCF-backed TP of SGD0.29. Fuyu is a safe haven that is cash-rich. It also has strong cash flow generation and high dividend yield (10.5% in FY16F).

We also think that Fuyu is an attractive takeover target, especially by its peers. Maintain BUY, with a DCF-backed TP of SGD0.29, implying 12.8x FY16F P/E.

Full report here.

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