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Attractive at ex-cash PE of 8.1x

  • 3Q21 earnings below, core net profit declines 40.6% y-o-y to S$3.8m
  • Supply chain disruptions impacted customer orders
  • Expect margin expansion to drive earnings growth
  • Maintain BUY with a lower TP of S$0.36

Investment Thesis: 

Trading at an attractive ex-cash PE of 8.1x against c.11% FY21-23F earnings CAGR. We believe that the supply chain situation should improve in FY22F and Fu Yu’s current valuation is attractive given its decent FY21-23F earnings CAGR of c.11%. We are expecting growth to be driven by a recovery in customer orders and ongoing initiatives to improve operating margins. 
 
Operating margin expansion. Fu Yu is taking steps to improve its gross profit margin through the consolidation of its production facilities in China, as well as increased use of automation to improve operational efficiency. A potential catalyst that could further improve its gross profit margins is the completion of the redevelopment of its Singapore factory at end-2021.
 
High cash and attractive dividend yield. As at end-3Q21, Fu Yu had a cash balance of S$72.7m, representing 33.3% of its market capitalization and zero borrowings. The stock currently offers a FY22F dividend yield of 5.5%.

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Valuation:

Maintain BUY with a lower TP of S$0.36.  We roll our earnings multiple to FY22F earnings and maintain our valuation peg at 15.2x (c.+2 SD) FY22F PE. Fu Yu is currently trading at 12.0x FY22F normalised earnings and at an FY22F ex-cash normalised PE of 8.1x.

Where we differ:

We are more optimistic on Fu Yu’s earnings and recovery.

Key Risks to Our View:

Prolonged COVID-19 outbreak, increased competition, escalation of the US-China trade war.\