Excerpts from analyst's report
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» Capital reduction approved – future dividends expected. At its recent AGM, over 99% of Fu Yu’s shareholders approved the capital reduction resolution. This will remove the accumulated losses position via an SG 0.5 cents/share payout. In addition, the company will be able to pay dividends going forward and we expect a 6% maiden dividend yield for FY15.
» Additional cost-cutting could lead to margin boost. We expect Fu Yu’s gross margin to improve significantly to a conservative 13.9% in FY15 from 12.2% in FY14. 1Q15 gross margin actually improved to 14.8% from 8.9% in 1Q14, which further substantiates our view. Going forward, we believe projects with better margins from its precision injection moulding and tooling segments, the increase in automated processes, and more cost-cutting from its China factories should continue to contribute positively to gross margins.
» A robust FY15 ahead. We believe FY15 could be a record year for Fu Yu, with NPAT levels not seen since FY04. With margins recovering on cost-cutting, restructuring efforts and higher-margin projects, we expect about 39% YoY NPAT growth for FY15 (FY14: 28.5%). In addition, the expected pick-up in Singapore and China business should also contribute positively to earnings, and we expect revenue contribution growth from the medical, environment and automobile products segments.
The company is also keen to expand contributions from the automobile sector and is already in project talks with several parties at the moment. With rich cash flow generation from operations of SGD20m- 30m a year, we think Fu Yu is a cash cow ready for milking and FY15 will likely be a key inflection point. Maintain BUY with a DCF-backed TP of SGD0.30 (WACC: 12%, TG: 0%).
Fulll report here.
