Broker's take: DBS sees Fu Yu 'moulding for growth', initiates coverage with 'buy'

DBS Group Research has initiated coverage on precision plastic components maker Fu Yu Corporation with a "buy" call and a target price of S$0.35.

In a research note on Wednesday, DBS cited a turnaround in the manufacturing sector, growth potential, improving margins and Fu Yu's strong financial positioning as reasons for its view.

Manufacturing PMIs (Purchasing Managers' Index) in China, Singapore, and Malaysia - where Fu Yu's manufacturing facilities are located - are showing positive signs of recovery heading into 2020, wrote DBS analyst Ling Lee Keng. This will likely lead to an uptick in earnings and revenue for Fu Yu, Ms Ling added.

Moreover, Fu Yu is shifting its focus to products that are more sustainable and have higher growth potential. The group's business strategy is to shift towards the consumer, medical, and automotive industries, which are poised to grow at "high single digits", as compared to the growth of the general plastic injecting and moulding industry of slightly below 5 per cent, Ms Ling noted.

DBS also expects Fu Yu's cost enhancement initiatives to improve its margins. According to Ms Ling, the redevelopment of Fu Yu's Singapore factory and the consolidation of its China operations in Shanghai and Suzhou is forecast to further lift normalised net profit margins to 8.2 per cent for fiscal 2020, up from 5.4 per cent in FY2018.

In addition, DBS highlighted that Fu Yu has no debt, while its cash and cash equivalents total S$84.6 million, or 44.1 per cent of its market cap as at Jan 12.

The brokerage also noted that although Fu Yu has a dividend policy of paying out at least 50 per cent of its PATMI (profit after tax and minority interests), the company has been consistently paying out dividends higher than that, at above 80 per cent of PATMI, from fiscal 2015 to 2018.

"Given its high cash level and stable business performance, we believe that Fu Yu's dividend payout is likely to be maintained in the foreseeable future," Ms Ling said.

Nonetheless, key risks to this view include a slowdown in manufacturing activity, increasing competition, escalation of the US-China trade war, and a sharp decline in the US dollar and Singapore dollar exchange rate, since a significant portion of Fu Yu's trade transactions are denominated in US dollars, DBS pointed out.

Its target price of S$0.35 represents a 40 per cent upside from the counter's Jan 14 close of S$0.25. As at 11am on Wednesday, Fu Yu shares were trading at S$0.275, up 2.5 Singapore cents, or 10 per cent.