SINGAPORE (Apr 6): Companies are expected to see immense pressure of their cash flows, as business grinds to a halt amid the Covid-19 pandemic.
Small- and medium-sized enterprises (SMEs), in particular, are expected to face a liquidity crunch as business dwindles on efforts to contain the outbreak. But even bigger businesses that are higher geared are not expected to be spared.
And in this uncertain climate, cash is king.
“In the manufacturing sector, all the companies under our coverage have net cash balance sheets with some having zero borrowings. As such, we think these companies will not face cash flow issues even if the Covid-19 outbreak extends till the end of 2020F,” says CGS-CIMB Research lead analyst William Tng in an April 1 report.
Among these companies, Tng highlights two small-cap manufacturing firms that are poised to survive – and perhaps even thrive – amid the Covid-19 crisis.
The brokerage is upgrading China Sunsine Chemical Holdings and Fu Yu Corp to “add”, with target prices at 38 cents and 21 cents, respectively.
Tng notes that China Sunsine is debt-free, with 89% of its share price backed by net cash.
“We determine 26.5 cents as the trough price for China Sunsine,” Tng says. “We believe that China Sunsine’s near-term challenging outlook has been more than priced in by the market, and recommend long-term investors accumulate at this level.”
Meanwhile, the analyst also sees value emerging for Fu Yu Corp, which has seen its share price drop sharply by more than 30% since its 52-week high of 28.5 cents on Jan 17.
“Hence, we upgrade our recommendation from ‘hold’ to ‘add’ even after our 16-23% earnings cuts to factor in lower revenue,” Tng says.
CGS-CIMB’s earnings downgrade for FU Yu Corp comes amid lockdowns arising from the Covid-19 outbreak and concerns of weaker end demand as global economic growth slows.
However, Tng believes the company has enough ammunition in its war chest to weather the storm.
“We estimate Fu Yu’s net cash position as at end FY2020F to be $93.7 million – representing zero debt balance sheet. As at end March 26, 2020, net cash was 61% of Fu Yu’s market cap,” Tng says.
Meanwhile, he projects Fu Yu’s FY2020F dividend yield to hit 8.5%.
As at 10.50am, shares in China Sunsine are trading 1 cent lower, or down3.5%, at 28 cents, while shares in Fu Yu are trading 0.4 cent lower, or down 2.0%, at 19.6 cents.
