Simons Trading Research

Author: simonsg   |   Latest post: Fri, 21 Feb 2020, 10:30 PM


Fu Yu Corp - Massive Hidden Value in Properties Recognised at Cost

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  • Fu Yu’s conservative accounting policy in recognising its properties at book value has undervalued the assets by S$50m, or 33% of its market cap, based on its 2018 annual report. Any disposal to unlock value could further rerate the stock.
  • The hidden value of these properties, its cheap valuation, diversified operations and low utilisation rate make Fu Yu an attractive takeover target.
  • Fu Yu offers dividend yield of 8.5% for 2019, and net cash forms 53% of its market cap. Maintain BUY and Target Price of S$0.285.

What’s New

Disclosure of properties’ market value in 2018 annual report indicates massive hidden value.

  • In its latest 2018 annual report, FU YU CORPORATION LTD (SGX:F13) revealed that the fair value of its leasehold properties amounts to S$65.7m, with carrying amount of S$15.6m. This S$50m discrepancy indicates Fu Yu’s book value is undervalued by 7 S cts/share or 33% of its market cap. (See Fu Yu's announcements.)

Deeper research on FU YU’s properties shows consistent data.

  • To uncover the up-to-date value of Fu Yu’s properties, we pegged the value of its land to the latest transaction price. As a result, we derived a value of S$62.5m, slightly below the fair value estimated by Fu Yu in its 2018 annual report that amounted to S$65.7m.
  • In addition, we note that Fu Yu’s most valuable properties are located in Singapore, followed by Malaysia and China. To recap, all nine of Fu Yu’s properties including an investment property in Malaysia, are being recognised on its balance sheet at cost less accumulated depreciation.

Potential disposal of properties could unlock value, and hidden value makes FU YU an attractive takeover target.

  • We believe any potential disposal of properties to further streamline its operations could unlock the hidden value and reduce operational costs. Furthermore, the hidden value of its assets, on top of its cheap valuation, diversified operations and low utilisation rate, makes Fu Yu an attractive takeover target.

Recent takeover offer of PCI at attractive premium could lead to re-rating.

  • On 4 Jan 19, PCI LIMITED (SGX:P19) announced it had received a takeover offer from Platinum at S$1.33 per share, a premium of 60.1% over the volume weighted average price of the shares for the 12-month period up to 17 Sep 18. The valuation metrics of 5.5x TTM EV/EBITDA based on the offer price is 83% higher than Fu Yu’s 3.0x 2019F EV/EBITDA.

Stock Impact

BUY for high and sustainable dividend yield, cheap EV/EBITDA

  • Fu Yu offers a high and sustainable dividend yield of 8.0% for 2018 and we expect this to increase to 8.5% in 2019 on the back of improving net profit, FCF and strong net cash of S$80m (S$0.11 per share).
  • In 2018, Fu Yu raised its interim dividend for the first time in three years, and we expect further increases. See Fu Yu's dividend history.

Takeover target for its valuation, diversification, capacity and salary savings.

  • Fu Yu could be a takeover target given its:
    1. attractive valuation of 3.0x 2019F EV/EBITDA. Note that peers have been privatised at EV/EBITDA of 5.0-25.7x;
    2. geographically diversified plants and customers are highly sought after;
    3. low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity, and
    4. low-hanging fruit from the savings in 3 co-founders’ remuneration, estimated at S$2.3m-3.0m annually, or 21-28% of 2018 net profit.

Earnings Revision / Risk

  • Our earnings forecasts are unchanged.

Valuation / Recommendation

  • Maintain BUY and target price of S$0.285, based on 5.7x 2019F EV/EBITDA, pegged to peers’ average. It implies 2019F dividend yield of 6.0% and ex-cash PE of 11.3x.

Share Price Catalyst

  • Higher-than-expected net profit and dividend.
  • Potential takeover offer.
  • Potential corporate actions to unlock values such as disposal of properties.

Source: UOB Kay Hian Research - 15 Apr 2019

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