Muted growth ahead
- FY21 results above expectations, helped by new business unit.
- Lower gross margin, dragged by lower-margin new business.
- Focusing on products with longer term stability and growth potential
- Downgrade to HOLD with lower TP of S$0.29, suspending coverage on stock
Investment Thesis:
Downgrade to HOLD on muted growth outlook and suspending coverage due to reallocation of internal resources. We have incorporated contributed from the new business unit, Fu Yu Supply Chain Solutions Pte Ltd (FYSCS) which was acquired in 2H21 into our forecasts, and also expected improvement on the supply chain disruptions. Despite this, earnings growth is still muted at 5%/7% for FY22F/FY23F. Though FUYU is trading at an attractive ex-cash PE of 6.6x, given the lacklustre outlook, we downgrade the stock to HOLD.
Key catalyst – Operation of the new plant in Singapore, which could improve margins. Catalysts to look forward to would be in 2H22/2023, with the expected operation of the new plant in Singapore. This could help to improve margins as the new plant has increased automation with higher precision manufacturing capabilities.
Strong financials with high cash and attractive dividend yield. As at end 4Q21, net cash stood at S$78.3m, accounting for c.40% of the current market capitalization. This works out to S$0.104 cash per share. The stock currently offers a FY22F dividend yield of 6.0%.
Valuation:
Downgrade to HOLD with a lower TP of S$0.29. Our TP is lowered to S$0.29 (previously S$0.36) pegged to +1SD of its 4-year average PE of 12x, (vs +2SD of 15x previously), given the lacklustre earnings growth outlook. Downgrade to HOLD on muted growth outlook.
Where we differ:
We are less 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.