Excerpts from UOB KH report
Analyst: John Cheong
| FUYU continues to put in efforts to optimise its operations. Three key initiatives which will lead to cost savings and growth include: a) liquidation of a loss-making JV in Malaysia; b) lease renewal for its Singapore plant; and c) closure of its Shanghai factory.
Maintain BUY and target price of S$0.285. |
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WHAT’S NEW
• Liquidation of loss-making JV could lead to notable savings. In Jul 19, Fu Yu Corporation (FUYU) started voluntary liquidation of 40%-owned Berry Plastics in Malaysia. We expect the process to complete by end-19 and the earnings drag from this JV should drop from an S$0.8m loss in 2018 to S$0.5m loss in 2019 and to zero in 2020.
• Renewal of lease; redevelopment of a plant in Singapore. FUYU will be renewing its leases for 7 & 9 Tuas Drive 1 for another 20 years from 2021. On the other hand, it will sell 5 Tuas Drive 1 by 2020 to comply with the lease renewal term.
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FUYU also plans to redevelop its plant at 9 Tuas Drive 1 to expand its operations. The estimated capex is S$13m, which can be partially funded by the disposal proceeds from 5 Tuas Drive 1.
• Closure of Shanghai factory and shift of factory to Suzhou. In Aug 19, FUYU received an early termination of lease for its Shanghai factory to be on 31 Jan 20, from the initial 31 Aug 21. As a result, FUYU made a strategic decision to shift operations in Shanghai to its Suzhou factory which has a larger production capacity and is ideally located to serve its customers in Shanghai.
The medium-term benefits include lower overheads and better utilisation at its Suzhou factory. We understand that labour cost in Shanghai is 10-20% higher than in Suzhou and the local government in Shanghai does not encourage manufacturing industry to operate in the city due to pollution issue.
STOCK IMPACT
• BUY for high and sustainable dividend yield, cheap EV/EBITDA. FUYU offers a high and sustainable dividend yield of 7.0% for 2018 and we expect this to increase to 7.4% in 2019 on the back of improving net profit, FCF and strong net cash of S$82.4m (S$0.11/share) as of 2Q19.
In 2018, FUYU raised its interim dividend for the first time in three years, and we expect further increases ahead.
• Takeover target for its valuation, diversification, capacity and salary savings. FUYU could be a takeover target, given its:
| a) attractive valuation at 3.5x 2019F EV/EBITDA currently. Note that peers were 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%, which could appeal to acquirers who are in a hurry to increase production capacity; and d) low-hanging fruit from the savings of three co-founders’ remuneration, estimated at S$2.3m-3.0m annually, or 21-28% of 2018 net profit. |
| EARNINGS REVISION/RISK • No change to our earnings forecasts. VALUATION/RECOMMENDATION • Maintain BUY and target price of S$0.285, based on 5.7x 2019F EV/EBITDA, pegged to peers’ average. It implies 2019F dividend yield of 7.4% and ex-cash PE of 7.7x. SHARE PRICE CATALYST • Higher-than-expected net profit and dividend. • Potential takeover offer. • Potential corporate actions to unlock values, such as disposal of properties. |
Full report here.
