April 15, 2019

FUYU’s conservative accounting policy in recognising its properties at book value has undervalued the assets by S$50m, or 33% of its market cap, based on its 2018 annual report. Any disposal to unlock value could further rerate the stock. The hidden value of these properties, its cheap valuation, diversified operations and low utilisation rate make FUYU an attractive takeover target. FUYU offers dividend yield of 8.5% for 2019, and net cash forms 53% of its market cap.

In its latest 2018 annual report, Fu Yu Corp (FUYU) revealed that the fair value of its leasehold properties amounts to S$65.7m, with carrying amount of S$15.6m. This S$50m discrepancy indicates FUYU’s book value is undervalued by 7 S cts/share or 33% of its market cap. To uncover the up-to-date value of FUYU’s properties, we pegged the value of its land to the latest transaction price. As a result, we derived a value of S$62.5m, slightly below the fair value estimated by FUYU in its 2018 annual report that amounted to S$65.7m. In addition, we note that FUYU’s most valuable properties are located in Singapore, followed by Malaysia and China. To recap, all nine of FUYU’s properties including an investment property in Malaysia, are being recognised on its balance sheet at cost less accumulated depreciation.

We believe any potential disposal of properties to further streamline its operations could unlock the hidden value and reduce operational costs. Furthermore, the hidden value of its assets, on top of its cheap valuation, diversified operations and low utilisation rate, makes FUYU an attractive takeover target. On 4 January 2019, PCI announced it had received a takeover offer from Platinum at S$1.33 per share, a premium of 60.1% over the volume weighted average price of the shares for the 12-month period up to 17 Sep 18. The valuation metrics of 5.5x TTM EV/EBITDA based on the offer price is 83% higher than FUYU’s 3.0x 2019F EV/EBITDA.

FUYU offers a high and sustainable dividend yield of 8.0% for 2018 and we expect this to increase to 8.5% in 2019 on the back of improving net profit, FCF and strong net cash of S$80m (S$0.11 per share). In 2018, FUYU raised its interim dividend for the first time in three years, and we expect further increases. FUYU could be a takeover target given its: a) attractive valuation of 3.0x 2019F EV/EBITDA. Note that peers have been privatised at EV/EBITDA of 5.0-25.7x; b) geographically diversified plants and customers are highly sought after; c) low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity, and d) low-hanging fruit from the savings in three co-founders’ remuneration, estimated at S$2.3m-3.0m annually, or 21-28% of 2018 net profit.  Our earnings forecasts are unchanged. Maintain BUY by UOB Kay Hian and target price of S$0.285, based on 5.7x 2019F EV/EBITDA, pegged to peers’ average. It implies 2019F dividend yield of 6.0% and ex-cash PE of 11.3x.  Share price closed at S$0.21.