DBS analyst Chung Wei Le has kept his “buy” call and 40 cents price target on Fu Yu Corp following the manufacturer’s US$4.5 million acquisition of Avantgarde Enterprise.
The privately-held company, which was sold by one Hu Huilan, was incorporated in Singapore on Nov 2019 and is in the provision of supply chain management services for commodities and trading in exchange-traded financial futures (derivatives).
Fu Yu, which is funding this deal internally, expects to complete the transaction by July 30. For the FY ended Dec 30, Avantgarde Enterprise reported earnings before tax of $3.73 million and it has a net book value of $3.14 million.
According to Fu Yu, the acquisition lets it diversify into a new business area given how it is “challenging to purely rely on its core manufacturing business to continue a growth trajectory,” writes Chung.
Fu Yu plans to centralise its resin procurement process via Avantgarde Enterprise and achieve cost savings through economies of scale.
On a proforma basis, assuming the acquisition was completed on Jan 1 2020, Fu Yu’s earnings would have increased by 18.4% to $20 million from $16.9 million.
See also: DBS remains positive on Fu Yu Corp's margin expansion and higher production, ups TP to 40 cents
Calling it “the best of both worlds”, Chung is upbeat on this deal. “We believe that the deal is both cheap and strategic – attractive valuations and it opens a new business opportunity,” writes Chung in a July 19 note.
“However, the sustainability of Avantgarde Enterprise’s earnings is uncertain as we should bear in mind that FY20 was a very volatile year for commodities and profits could be exceptional,” cautions Chung.
He also notes that Fu Yu’s revenue growth, at 4.6% CAGR from FY2020 to FY2021, is “lacklustre”. As such, the main driver of net profit (9.3% CAGR from FY20-23F) is from the expansion of its operating margins.
Nevertheless, the acquisition of Avantgarde aside, Chung is already bullish on Fu Yu, given its attractive valuations of price-earnings ratio of 6.1 times excluding cash, and FY2021 dividend yield of 5.2%. The company’s cash balance of $102.1 million, post-acquisition, is equivalent to 44.5% of its market value.
Fu Yu closed July 19 at 30 cents, down half a cent.
