• We update our forecast and target price for Fu Yu following the release of its 1H21 results (on 11 Aug). Our last report on Fu Yu was Fu Yu Corp - CGS-CIMB Research 2021-03-05: A New Chapter Begins.
• Other than a 20.1% y-o-y increase in 1H21 net profit, the key highlight was the declaration of a special dividend of S$0.033 per share.
• We reiterate our ADD call on Fu Yu and note that it is currently the highest dividend-yielding stock under our coverage for FY21F.

Fu Yu's 1H21 Net Profit Grew 20.1% Y-o-y

• We update our forecasts and view on Fu Yu (SGX:F13) following its 1H21 results (released 11 Aug 2021, see Fu Yu's announcements).
• 1H21 revenue fell 1.7% y-o-y to S$70.4m, while net profit grew 20.1% y-o-y to S$8.9m. This was due to improvement in GPM to 23.8% in 1H21 (vs. 21.4% in 1H20) due to changes in revenue mix, lower operating cost (Fu Yu closed its Chongqing plant in China in 3Q20), and successful ongoing efforts to improve cost management and raise operational efficiencies. Selling and administrative expenses fell 25.8% y-o-y to S$9.4m from S$12.6m a year ago.
• Balance sheet remained in a net cash position of S$100.2m, with zero borrowings. Singapore revenue grew 20.1% y-o-y to S$25.7m, driven by higher demand from medical products, while Malaysia revenue grew 4.8% y-o-y to S$17.4m, on higher sales from printing and imaging products, power tools and new industrial products.

Fu Yu Completed Its Maiden Acquisition on Avantgarde

• Fu Yu completed the acquisition of a 100% stake in Avantgarde Fu Yu could gear up its balance sheet to grow this trading business.

Capital Allocation – Special Dividend

• A key highlight in Fu Yu's 1H21 results was the announcement of a special dividend of S$0.033 and the increase in interim dividend to S$0.004 (1H20: S$0.0035).
• Going forward, capital allocation will be influenced by capex needs (Fu Yu’s new plant at No. 9 Tuas Drive is due to be completed end-2021F) and capital to grow the Avantgarde Enterprise business organically and via joint ventures/partnerships/strategic alliances with third parties.

Reiterate ADD on Fu Yu

• We reiterate our ADD call on Fu Yu, supported by our forecasted 1 1.59x (previously 1.49x) on FY21F BV/share.

• Earnings accretion from the Avantgarde Enterprise acquisition is offset by a higher beta assumption to 0.89 (previously 0.77), given the riskier nature of financial trading activities.
• Downside risks are increased competition and worsening of the COVID-19 pandemic. Higher-than–expected earnings growth and further accertive acquisitions are possible re-rating catalysts.

Source: CGS-CIMB Research - 24 Aug 2021