SINGAPORE (May 13): DBS Group Research is maintaining its “hold” call on Fu Yu Corp with a target price of 21 cents.
In a Wednesday report, analyst Ling Lee Keng says, “We continue to expect FY20 to be weak on the back of the pandemic affecting manufacturing activity and a weakened economic outlook. While we do not expect core earnings to return to pre-Covid-19 levels in FY21, a bright spot could be the potential bottoming of core earnings in 1H20.”
Yesterday, Fu Yu announced its business update for 1Q20 and recorded a 25.5% drop in its 1Q20 revenue to $34.8 million from $46.7 million a year ago, due mainly to decreased sales from its manufacturing operations in Singapore and Malaysia, and particularly in China where the Group’s factories had to remain closed following the Chinese New Year holidays.
The group’s factories in China have since resumed operations gradually after mid-February 2020 and it has ensured it is in strict compliance with government directives and measures to deal with the Covid-19 outbreak in the countries where it has operations.
In line with lower revenue, the Group’s gross profit decreased 16.9% to $6.9 million in 1Q20 from $8.3 million in 1Q19.
Including the foreign exchange gains of $3.2 million, Fu Yu’s PATMI rose 177% y-o-y to $4.4 million.
“The situation is still in a state of flux and there is still a lot of uncertainty surrounding the impact of the Covid-19 pandemic. However, at this current juncture, we believe that core earnings could potentially bottom in 1H20 as governments in its operating regions lift their lockdown/partial lockdown measures to allow manufacturing activities to resume,” says Ling.
On the other hand, the stock was trading at a high of 28.5 cents in Jan 2020. Share price has since fallen some 22.8% to 22 cents. Hence, the analyst believes that Fu Yu has become a more attractive M&A target.
Some of Fu Yu’s attractive traits include its strong operating cash flows, zero debt, cash represents 53.4% of its market capitalisation and the stock is currently trading at 2.9 times training 12-month EV/EBITDA.
As at 1.45pm, shares in Fu Yu are trading at 22 cents or 1.0 times FY20 book with a dividend yield of 7.3%.
