Excerpts from UOB Kay Hian report

Analyst: John Cheong


Massive Hidden Value In Properties Recognised At Cost

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.

FU YU

Share price: 
20.5 c

Target: 
28.5 c

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.

FY18 dividend

Ex date

Payment date

1.0 c

09 May 2019

23 May 2019

0.3 c

22 Nov 2018

05 Dec 2018

0.3 c

27 Aug 2018

10 Sep 2018

FUYU offers dividend yield of 8.5% for 2019, and net cash forms 53% of its market cap. Maintain BUY and TP of S$0.285.


WHAT’S NEW
• Disclosure of properties’ market value in 2018 annual report indicates massive hidden value. 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.

johncheong maybank9.14Potential disposal of properties could unlock value, and hidden value makes FUYU an attractive takeover target.
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.

-- John Cheong (photo)

Deeper research on FUYU’s properties shows consistent data. 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.

• Recent takeover offer of PCI at attractive premium could lead to re-rating. On 4 Jan 19, 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.

STOCK IMPACT
BUY for high and sustainable dividend yield, cheap 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.

Takeover target for its valuation, diversification, capacity and salary savings. 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.

Full report here


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