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Broker's take: DBS downgrades Fu Yu to 'hold' amid Covid-19 outbreak

DBS Group Research has downgraded precision plastic components manufacturer Fu Yu Corporation to "hold" after factoring in an estimated 25 per cent fall in FY2020 earnings due to the dampened economic outlook brought about by Covid-19.

As at 2.56pm, Fu Yu shares edged up 0.1 Singapore cent or 0.5 per cent to 19.9 cents, a 5.2 per cent discount to DBS's 21 cents target price for the stock. DBS previously had a 35 cents price target for Fu Yu.

In a Wednesday report on Fu Yu, DBS analyst Ling Lee Keng said: "While we are expecting higher sales from its medical segment, a contraction across all other segments is likely to outweigh that positive impact. Our earnings cut arises mainly due to global supply chain disruptions and an economic slowdown."

Malaysia’s movement control order, enforced for a four-week period since March 18, is likely to result in up to a 2 per cent loss in revenue for FY2020, Ms Ling added. For FY2019, Malaysia contributed to around 22 per cent to Fu Yu's revenue.

The bank-brokerage lowered its FY2020 revenue forecast for Fu Yu to S$157 million from S$175 million. For FY2021, forecasts were cut by 28 per cent to S$171 million.

While earnings are likely to take a dip, Ms Ling pointed out that Fu Yu's shares have fallen by 30 per cent since January, making it an attractive merger and acquisition target.

She said: "Fu Yu is currently trading at 2.5 times its trailing 12-month EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortisation) and its cash levels represent 57 per cent of its market capitalisation. The company has strong operating cash flows of S$20 million and no debt."

A faster than anticipated improvement in efforts to tackle Covid-19 globally and a privatisation attempt are catalysts for an upward revision, said DBS.

Key risks to DBS's view include the Covid-19 outbreak lasting longer than expected, increased competition, and a resumption of escalations in the US-China trade war.

DBS's report is prepared under the Research Talent Development Grant Scheme where the Monetary Authority of Singapore provides co-funding to groom research talent to initiate research coverage primarily of mid to small cap Singapore Exchange listed companies.

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