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Analysts positive on Fu Yu Corp as 9M20 profits surpass expectations

Lim Hui Jie
Lim Hui Jie • 3 min read
Analysts positive on Fu Yu Corp as 9M20 profits surpass expectations
Analysts from DBS and CGS-CIMB have upgraded their calls on Fu Yu Corp after it recorded a strong set of 9M20 results.
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Analysts from DBS and CGS-CIMB have upgraded their calls on Fu Yu Corp from “hold” to “buy” and “add” respectively after the company surpassed expectations by recording a 9MFY2020 core net profit of $12.3 million.

RHB Group Research analyst Jarick Seet has maintained his “buy” recommendation, and raised his target price on the counter to 30 cents from 28 cents previously.

CGS-CIMB’s William Tng has also raised his target price to 28.8 cents from 24 cents as Fu Yu’s 9MFY2020 net profit came in above expectations, at 95% of his FY2020 forecasts.

Tng said the strong performance was due to gross profit margin expansion in 9MFY2020 to 23.5% from 18.0% in 9MFY2019. This was attributed to lower revenue contribution from printing and imaging products which generate lower margins and higher revenue contribution from better margin medical devices.

He also attributed the higher figures to the lower operating expenses y-o-y with the closure of its Chongqing and Shanghai facilities.

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He noted that in China, all product segments saw revenue decline in 9MFY2020, but revenue growth recovered on a q-o-q basis in Fu Yu’s operations in three countries (China, Malaysia and Singapore). In 1HFY2020, Fu Yu’s operations in Malaysia were affected by the movement control order which led to the suspension of operations for some of its customers.

Meanwhile, DBS Group Research’s Chung Wei Le and Ling Lee Keng have raised their target price to 31 cents as they believe that FY2020F could be the “bottom” for Fu Yu’s core earnings.

The way they see it, the stock’s current 9.1x (-0.9 standard deviation or SD) normalised 12-month forward PE represents an attractive entry opportunity.

Furthermore, they believe the redevelopment of its Singapore factory and consolidation of its factory operations in China will further lift margins in FY2021F.

Fu Yu’s cash represents 55% of its market capitalisation and the stock is currently trading at an FY2021F dividend yield of 6.8%.

RHB’s Seet broadly agreed with the points above, noting that while revenue dropped, the lower operating expenses lifted the company’s profits.

He noted 9MFY2020 profit after tax and minority interests (PATMI) surged 36.7% y-o-y despite a 23.4% drop in revenue.

This can be attributed mainly to the change in revenue mix, a reduction in headcount, as well as the group’s ongoing initiatives to sustain costs and raise operational efficiencies. Gross profit margin (GPM) continued to improve to 23.5% from 18% a year ago.


See: DBS downgrades Riverstone Holdings to ‘hold’, other analysts still positive

He believes with challenging business conditions expected ahead, management will continue to evaluate avenues to further rightsize and optimise its manufacturing operations in China to ensure it is better positioned for long-term business sustainability, such as closing its Chongqing factory, which will likely provide further cost savings operationally.

Seet said with further new projects in the medical, consumer and automotive fronts, he expects “positive growth momentum” for 4QFY2020.

“Despite a blip in FY2020F caused by the pandemic, we believe that Fu Yu – with its strong net cash balance sheet – will able to weather the storm, and at the same time, reward investors with attractive dividends going forward,” he adds.

As at 4.07 pm, shares of Fu Yu Corp were trading at 24 cents, with a FY2020 price to book ratio of 1.1 and dividend yield of 6.5%

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