July 9, 2019

We expect revenue and margins to continue growing with new projects in the auto, consumer and medical space. With >80% of revenue in USD terms, it should benefit from the strong greenback. We also think it is an attractive potential M&A target for bigger players seeking immediate South-East Asia exposure, to diversify away from US/China.

Topline continued to grow (+0.7% YoY) in 1Q19, mainly contributed by new customers in the automotive & power tool, medical and consumer sectors. As a result, GPM expanded to 17.7% from 16% a year ago, on higher profitability from the automotive and medical projects. This growth should continue, as Fu Yu will likely enjoy higher contributions from new projects from the medical sector that will likely ramp up from 2Q19 onwards.

With a sturdy balance sheet (SGD82.8m in net cash), positive operating cash flow of SGD15-20m a year and an improving business, we expect Fu Yu to continue rewarding shareholders with higher and more attractive dividends. We estimate DPF to be maintained at SGD0.016 for FY19F, implying a yield of 7.4% – and this may increase if PATMI rises far above our forecast.

With the ramp-up in its existing projects set to continue in subsequent quarters, coupled with further new projects on the medical and consumer and automotive front, we expect the positive growth momentum to continue. In addition, an appreciating USD should also be beneficial to the company. Management is still actively seeking ways to further optimise the cost structure of its operations in the region, especially in China – such as right-sizing exercises, and the sale or lease of unutilised factory space if suitable opportunities arise. These, in turn, would further improve margins. Supported with an attractive yield, we maintain our BUY rating and DCF-based TP of SGD0.24. – RHB 

Fu Yu Corp closed at: S$0.22