RHB Group Research’s Jarick Seet has maintained his “buy” call and raised his target price for Fu Yu Corp to 33 cents from his previous figure of 30 cents.
He highlighted the leadership shake up that took place at Fu Yu on Jan 22, which saw its trio of co-founders retire after 42 years, selling the majority of their stake.
See:Fu Yu Corporation founders to retire
The buyer is a Singaporean private investor who mandated fund manager Pilgrim Partners Asia to purchase the shares.
The current management team remains unchanged, but two executive directors have been appointed to the board, and a new leadership team will help to revive growth for the company.
Seet is of the opinion that the new executive directors Choo Boon Tiong and Seow Jun Hao have amassed valuable corporate experience and diverse knowledge in various businesses.
Furthermore, they will be undergoing an organisation assimilation process to get a better grasp of the group’s full range of operations, and will continue to work closely with management and the rest of the board, on long-term strategic plans.
But despite these changes at the helm, it seems to be business as usual for the company, and the board reaffirmed that Fu Yu’s core business in precision manufacturing will continue, and is looking forward to new perspective and opportunities that could enhance profitability and create
value for shareholders over the long term.
Seet noted as of 1HFY2020, Fu Yu has a strong net cash position of $97.8 million and zero borrowings. It has also maintained its interim dividend payouts, and Seet expects a distribution per share (DPS) of 1.7 cents for FY2020, which implies a 6.3% yield.
As management learnt from past mistakes during the manufacturing crisis in the early 2000s, Fu Yu’s prudent approach resulted in a net cash balance sheet, valued at close to 53% of its market cap.
“This, together with its rich cash flow, leads us to believe that the company should be able to weather the current challenging environment, and will likely emerge stronger than its competitors.” Seet said.
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He also expects the company to record positive earnings growth for 4QFY2020 with further new projects in the medical, consumer and automotive fronts.
Furthermore, he also thinks that it can concurrently reward investors with attractive dividends despite an estimated temporary drop in profits for FY2020. However, he highlights that as the new investor owns 29.8% of the company – a hair’s breadth from the mandatory takeover threshold of 30% - he does not rule out potential privatisation in the future, although he said this will not be in the near term, as the new team will have to settle in and know the company better first.
At 2.50pm, shares of Fu Yu traded at 28 cents, with a FY2020 price to book ratio of 1.3 and dividend yield of 5.6%
