Excerpts from UOB KH report

Analyst: John Cheong

Fu Yu Corp – BUY


Share price: 
24 c

29.5 c

High and sustainable dividend yield, inexpensive EV/EBITDA. FUYU offers a high and sustainable dividend yield of 7.1% for 2019, and we expect this to increase to 7.5% in 2020 on the back of improving net profit, FCF and strong net cash of S$85m as of 3Q19 (or 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 valuation, diversification, capacity and salary savings. FUYU could be a takeover target, given:

a) its attractive valuation at 3.2x 2020F EV/EBITDA (note that peers were privatised at EV/EBITDA of 5.0-25.7x in the past),

b) FUYU’s geographically diversified plants and customers are highly sought after,

c) its 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 of three cofounders’ remuneration, estimated at S$2.3m-3.0m p.a. or 20-27% of 2018 net profit.

“…The fair value of certain leasehold properties as at 31 December 2018 amounts to approximately $65,729,000 with the carrying amounts of $15,602,000.”

-- Fu Yu annual report 2018

Disclosure of properties’ market value in 2018 annual report indicates massive hidden value. 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 (S$0.07 per share), based on its 2018 annual report.

Any disposal to unlock value could further rerate the stock, in our view.

The hidden value of these properties, the company’s inexpensive valuation, diversified operations and low utilisation rate make FUYU an attractive takeover target.

johncheong maybank9.14John Cheong, analyst.Share Price Catalyst
• Events:

a) Higher-than-expected dividends,
b) potential takeover offer, and
c) potential corporate actions to unlock value, such as disposal of properties.

• Timeline: 3-6 months.

Full report here.

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