SINGAPORE (Mar 16): The share prices of most companies have sank in tandem with the Covid-19 outbreak, and this could well be a concern for investors.
Although this stock’s share price has dived some 24% year-to-date, RHB Group Research says that there is no reason to panic, but instead an opportunity to accumulate.
RHB analyst Jarick Seet says that plastic components manufacturer Fu Yu Corp is still a “top pick” for the brokerage, due to its sustainable margins and net cash position.
Earlier in January, Fu Yu reported that it was undertaking a redevelopment project at Tuas for a price tag of $15.4 million, in a bid to expand and improve its operations in Singapore. The project is slated to be completed in 4QFY2020.
The way Seet sees it, this project could be an ace up the group’s sleeve, as it works to treble the gross floor area (GFA) of the current building through redevelopment.
“Together with the investments in new and advanced production equipment, management expects to benefit from higher productivity and operational efficiency,” says Seet.
“Management also plans to invest in new manufacturing equipment to expand its production capacity, as well as enhance capabilities to produce higher-precision and better-quality products,” he adds.
Apart from this, Fu Yu is also set to benefit from the management’s decision to liquidate its Shanghai factory and shift production to Fu Yu’s loss-making Suzhou site, which has lower operating costs.
“We believe this will help reduce the longer-term operational cost for the whole group, and help the Suzhou factory become profitable quicker despite having to incur a $5.5 million one-off expense in FY2019,” says Seet.
“As such, we remain confident of the group’s outlook and believe this closure will be beneficial to Fu Yu in the longer term,” he adds.
On the whole, with new medical, consumer and automation projects in the pipeline, Seet is looking forward to a positive growth momentum for the group, along with improving margins from its factory closure in Shanghai.
“With a strong net cash balance sheet in hand, Fu Yu should be able to weather challenges and still reward investors with attractive dividends,” shares Seet.
“The recent correction allows investors to buy this net cash company at a more attractive FY2020F yield,” he adds.
RHB is reiterating its “buy” call on Fu Yu with a target price of 32 cents, representing a 60% upside for the stock.
Shares in Fu Yu Corp closed flat at 20 cents on Monday. This translates to a price-to-book (P/B) ratio of 0.9 times and an attractive dividend yield of 8.5% for FY2020 according to the brokerage’s valuations.
