• Fu Yu’s 2019 results were ahead of our expectations, with core earnings of S$18.3m, 41% higher than our forecast. The strong set of results was mainly driven by gross profit margin of 4.1ppt at core level for 2019 as the group successfully improved sales mix and achieved better cost and operational efficiencies.
• Fu Yu also proposed a final dividend of 1.0 S cents.
• We raise our 2019-21 net profit forecasts by 33.2-27.5% as we adjust our margin assumptions. Maintain BUY with a higher target price of S$0.30.

2019 Results

2019 results above expectations.

• Fu Yu Corp (SGX:F13) announced a 2019 core PATMI (excludes S$5.6m one-off expense from Shanghai factory closure) of S$18.3m (+54% y-o-y), 41% higher than our forecast. The strong set of results was mainly driven by the core net profit margin expansion of 4.0ppt in 2019.
• Full-year revenue declined by 2.0% as the higher revenue from Malaysia operations (+10.6% y-o-y) was offset by weaker contributions from its Singapore (- 2.0% y-o-y) and China (-5.9% y-o-y).

Improvement in gross profit margin driving growth.

• Although revenue slipped by 4.1% y-o-y in 4Q19, core earnings grew approximately 55% as gross profit margin surged by 7.1ppt compared with 3Q19, despite the one-off expense of S$0.2m being booked under cost of sales. This was largely the result of a shift in sales mix, as well as ongoing initiatives to achieve better cost and operational efficiencies.
• Excluding the one-off expense, selling and administrative expense fell by 4.4% y-o-y. Management attributed this to its ongoing cost control measures and reduction in headcount.

Proposed final dividend of 1.0 S cent/share.

• Fu Yu has declared total dividends for 2019 of 1.6 S cents (unchanged from 2018), representing a dividend payout of 95%.
• Going forward, we estimate a similar level of dividends which we believe is sustainable, given the group’s strong operating cash flow. This translates into an attractive yield of 6.2%.
• Fu Yu's balance sheet remained robust, with net cash as of end-19 at S$0.12/share, or 45% of market cap.

Stock Impact

Well positioned to capture business opportunities.

• Fu Yu is maintaining its strategy of broad diversity in its product portfolio to deliver stable and sustainable growth over the long term. Further, the group intends on focusing on products that have longer life cycles and higher growth potential such as medical, automotive, eco-friendly and smart home consumer products, and 3D printers.

Redeployment of its premises at 9 Tuas Drive to help improve productivity.

• Fu Yu in its press release on 9 Jan 20 announced that it has obtained approvals from the regulatory authorities to proceed with the redevelopment project at 9 Tuas Drive (targeted to be completed in 4Q20). Estimated capital expenditure is S$15.4m. The new building will have an estimated GFA of 9,000 sqm (more than 3x the size of the existing building).
• In addition, the new layout of the building is expected to facilitate a seamless workflow across tooling, moulding and assembly operations which could help improve productivity and operational efficiency.

Earnings Revision / Risk

• We raise our 2021-2022 net profit forecasts by 33.2-27.5% as we adjust our gross margin assumption.

Valuation / Recommendation

• Maintain BUY with a higher target price of S$0.30, pegged to peers’ average of 12x 2020F PE. Our target price implies a dividend yield of 6.2%.
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Share Price Catalyst

• Higher-than-expected net profit and dividend.
• Potential takeover offer.
• Potential corporate actions to unlock values, such as disposal of properties.

Source: UOB Kay Hian Research - 26 Feb 2020